Canadian Retail Markets Study

A Review of Competitiveness in the Canadian Refined Petroleum Marketing Industry
Prepared For: Industry Canada Natural Resources Canada Canadian Petroleum Products Institute

September 15, 1997
Suite 413, 1333 - 8th Street SW Calgary AB T2R 1M6 Canada 403-283-8704

Table of Contents
List of Figures _____________________________________________________ i List of Tables ______________________________________________________ ii Executive Summary _______________________________________________ iii Introduction _______________________________________________________ 1 Background Study Overview Report Format and Conventions Acknowledgments An Overview of the Model Competitiveness: The Pump Price Model in Motion Canada’s Petroleum Industry: Upstream and Downstream Upstream Industry Petroleum Refining Petroleum Marketing Taxation on Petroleum Products Pump Price/Margin Model: An Integrated View Marketing Sector Overview Competitiveness in the Retail Gasoline Sub-Sector Retail Gasoline Demand National Retail Petroleum Outlet Representation Retail Petroleum Outlet Modes Outlet Throughput Ancillary Services Gasoline and the Consumer Price Index Key Price History Margin History Canada vs. US Price History Rack Price History Demand vs. Price History 1 2 2 2 4 5 7 8 9 12 14 16 17 19 23 24 25 28 29 30 31 32 34 35 36

Part A Pump Price/Margin Model ____________________________________ 4

Part B The Structure of the Retail Petroleum Products Sub-Sector ________ 16

Part C Historical Trend Analysis ____________________________________ 30

Part D Selected Markets Study ______________________________________ 38

MJ ERVIN & ASSOCIATES

Introduction Methodology Study Market Findings Market by Market Competitive Analysis Findings Conclusions Recommendations

38 38 42 52 72 74 80

Part E Findings, Conclusions & Recommendations _____________________ 72

Appendices _______________________________________________________ 82 I Glossary of Terms________________________________________________ 83 II Source Data Tables ______________________________________________ 85 Table A: CPI Index: Selected Goods and Services Table B: Key Price / Margin History - Regular Gasoline Table C: Canadian Supply, Inventory, Demand, and Pump/Rack Prices Table D: Pump Price History - Study Markets Table D: Pump Price History - Study Markets (cont’d) Table E: Ex-tax Pump Price History - Study Markets Table E: Ex-tax Pump Price History - Study Markets (cont’d) Table F: Rack Prices - Study Markets Table F: Rack Prices - Study Markets (cont’d) Table G: Study Market Data - Throughput and Price by Grade Table H: Study Market Data - Rack Price, Tax (by Grade) Table J: Study Market Data - Blended Prices, Costs, Margin Table K: Study Market Data - Sales, Revenue, Outlet Costs, Income Table L: Study Market Data - Demographic Profiles 85 86 88 90 91 92 93 94 95 96 97 98 99 100

III Sources of Information about the Downstream Petroleum Industry____ 101

MJ ERVIN & ASSOCIATES

........................... 66 Figure 35: Saint John NB ........................... 69 Figure 36: Halifax ......................................... 4 Figure 2: 1996 Average Prices/Margins . 32 Figure 12: Monthly Margins 1991-1996 (Nominal $).........................Price History....Price History ........................................... 30 Figure 10: CPI Index Comparison ................................. 34 Figure 15: Monthly Rack Prices: Selected Markets ................................................... 44 Figure 21: Gross Marketing Margin Elements ...................................... 24 Figure 6: 1995 Retail Outlets by Province ...List of Figures Figure 1: Pump Price / Margin Model................................................................1988-1995 ......... 18 Figure 4: 1995 Refined Petroleum Products Demand by Product Category...................Price History .................................................................................................................................... 40 Figure 18: 1995 Average "Blended" Pump Price .............................................. Pump Price (nominal ¢/litre)........................................... 50 Figure 27: Victoria ...................................................... 53 Figure 28: Vancouver ......8¢ Pump Price) ......................................................................................... Gross Product Margin ...............................Regular Unleaded ...............................................tax.................................................................................................................................................... ex-tax elements .................................... 63 Figure 34: Montreal ...... 56 Figure 30: Regina ......Price History.......... 28 Figure 8: Outlet Representation by Service ... 62 Figure 33: Ottawa ................. 43 Figure 20: Ex-Tax Pump Price Elements ... 71 MJ ERVIN & ASSOCIATES i ............Price History.................. 35 Figure 16: Monthly Demand vs.............................................Price History .............................................................................................................................................................................. 48 Figure 25: Outlet / Volume Relationship ...................................................................................... 34 Figure 14: Canada / US Monthly Pump Price (Nominal $) ..................................... 42 Figure 19: Pump Price ..................................................................................................... 70 Figure 37: Charlottetown .................................. 16 Figure 3: 1996 Average Regular Gasoline Margins (56......Regional & Urban Groupings......................................................Price History..................................... Income....Selected Centres ..........................Price History ...................................................... 46 Figure 23: Average Annual Throughput per Outlet........ 29 Figure 9: Annual Gasoline Price (Cents per Litre) .......................................................................Price History ......................... 25 Figure 7: Outlet Representation by Mode............ 57 Figure 31: Winnipeg ..................................... 33 Figure 13: Monthly Gross Marketing Margins.......................................................................................................................................................................................................................Price History ...................................................................Selected Goods & Services .......................................................................... 36 Figure 17: Study Market Methodology ......... 45 Figure 22: Petroleum Gross Product Margins .................... 47 Figure 24: Outlet Volume vs. 54 Figure 29: Calgary ............................................................................. Costs..................... 31 Figure 11: Monthly Prices 1990-1996 (Nominal $) ............... 49 Figure 26: Outlet Revenues......... 58 Figure 32: Toronto ..Price History....................................... 24 Figure 5: Canadian Retail Outlet Population ...............................................................................

....... 1996 ................ 51 MJ ERVIN & ASSOCIATES ii .................................................................................................................. 39 Table 4: Estimated Cash Flow from Consolidated Net Revenue................................. 15 Table 3: Selected Study Markets ....................................... 13 Table 2: Taxes on Regular Gasoline on December 31............................List of Tables Table 1: Downstream Sales Channels ..............................

and a foundation for effective policy development.3 ¢ CRUDE PRICE source: Natural Resources Canada The model shows that in 1996. dealer income. the Canadian retail marketing sector realized an average gross product margin of 3. represented by crude. supplier costs and profitability. and ex-tax pump prices. together with a separate review of the refining sector. The model also illustrates that each sector margin is defined by the price at which feedstock or wholesale product is bought and then sold. These prices are determined in a competitive marketplace.1 ¢ 5. This Retail Petroleum Markets study provides a practical tool for understanding the dynamics of this vital and complex industry.3 ¢ 28. Pump Price/Margin Model The study presents a model which serves to illustrate the interrelationships between the many stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. each with unique MJ ERVIN & ASSOCIATES iii . This margin represents gross income (after wholesale product cost and freight costs) available to provide for retail marketing operations including outlet costs. and the Canadian Petroleum Products Institute (CPPI). Natural Resources Canada (NRCan).2 ¢ 24. 1996 Average Prices and Margins .5 cents per litre on the sale of regular gasoline in a typical major urban market.8 ¢ TAX 28. This study. forms a comprehensive overview of the competitiveness of the downstream petroleum industry in Canada.Regular Gasoline 10 City Average NOT TO SCALE PUMP PRICE 56.Executive Summary Study Objectives The Canadian Retail Petroleum Markets Study is a joint initiative of Industry Canada.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3.5 ¢ 0.4 ¢ 19. rack. Price competition occurs at three distinct levels in this industry.

500 retail outlets were in operation in Canada in 1995. From 1986 to 1995. Ancillary or non-petroleum revenue is an increasingly important feature of the retail gasoline marketing industry. While each of these marketing channels operates in a competitive environment. and the traditional automotive service bay. Historical Trends Changes in the average gasoline prices in Canada have remained at or below the “All Items” Consumer Price Index (CPI). compared to about 22. nine of the past ten years.000 in 1989.dynamics. Statistics Canada (Constant $) MJ ERVIN & ASSOCIATES iv . demand and other competitive factors existing at the time. The Canadian retail gasoline marketing sector is but one element of a much larger industry infrastructure. this study focuses on the retail gasoline sector. Dealers have a variety of relationships with their supplier. Convenience store. which potentially allow for reduced margins at the gasoline pump. due to its prominence in the public and media domain. Approximately 16. ex-tax pump prices declined by 4 cents per litre measured in nominal dollars. The resultant margins are therefore a reflection of the state of product supply. well over half of all outlets in Canada operate as lessees or independents. and declined by 10 cents per litre measured in constant dollars. The Structure of the Retail Petroleum Products Industry Retail petroleum marketing is typified by the retail “gas station” outlet. Annual Gasoline Price in Cents per Litre 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 Source: Natural Resources Canada (Nominal $). the responsibility for deciding upon retail pump prices resides principally at the local dealer level. encompassing several marketing channels which provide a range of petroleum products to industrial and domestic consumers. car wash. are examples of ways in which outlet petroleum sales are augmented by other revenues. and accordingly.

both refiners and marketers have experienced a decline in margins as a result of price competition at the rack and at the retail pump. This has both resulted in.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Despite an upwards trend in world crude prices since 1991. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. As a result of these trends. MJ ERVIN & ASSOCIATES v . as a consequence of refinery plant rationalization (closures) and a modest demand increase. however. From 1991 to 1996. Canadian average ex-tax pump prices in major markets have been virtually identical to those of the United States since mid-1994. improved retail outlet sales performance as a consequence of retail outlet rationalizations and demand increases.crude) 5¢ Marketing Margin (retail . while (average) combined gross refiner and gross marketing margins decreased by about 7 cents per litre. and has been a result of several factors including: • • • improved refinery utilization and efficiency. and emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs.The “tax-included” nominal pump price increased over this same period. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . Monthly Margins in Nominal Cents per Litre 30¢ Tax Content 25¢ 20¢ Canada Avg.

US Monthly Pump Prices 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada Selected Markets Study As part of this study. This provided for market-bymarket and regional comparisons of key competitiveness indicators. were selected for a detailed review of outlet economics. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. proprietary 1995 operating data were collected on a total of 481 retail outlets in the selected market groups. 19 markets representing a broad range of conditions. With the participation of several CPPI member companies. a distinct pattern was demonstrated: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market. When petroleum gross product margins were compared to their corresponding outlet throughputs. although this study provides an independent confirmation of this. wholesale product cost and freight charges) were isolated from the pump price. which led to two key findings: • Larger population centres and their surrounding communities consistently exhibited lower pump prices and narrower gross product margins than smaller. to derive 1995 average petroleum gross product margins for each of the 19 markets. the 19 study markets exhibited a high degree of correlation in gross product margin as a function of outlet throughput. but also had significantly higher throughputs per outlet. A wide range of petroleum gross product margins were evident. in order to identify market and/or regional competitive differences as potential issues or opportunities within the industry. rural markets. That such a relationship should exist was not surprising. and one by one. With few exceptions. MJ ERVIN & ASSOCIATES vi . This was integrated with selected NRCan price data. several “outside variables” (product taxes.Comparison of Canada.

000.000 Volume (litres) 4.000 6. corporate charity. this study estimated that within the 19- MJ ERVIN & ASSOCIATES vii .000 5. which reflects his investment in the outlet.000.000 3. head office and regional office overheads. not poor competition. and in major vs.000.000. revenues from ancillary operations (eg: convenience store. sales processing.• Smaller markets performed as competitively as larger centres. the residual revenue is available as profit to be re-invested into retail operations.000 Halifax Montreal 0¢ source: MJ Ervin & Associates Although a comparison of petroleum gross product margins to their corresponding throughputs was shown to be an effective competitiveness analysis tool. car wash) and outlet costs were factored into the market study analysis to derive a complete measure of average outlet income (in absolute dollars) in each region. These costs would include salaries of marketing representatives and management. of which gross product margin and throughput are only two of several factors.000 2.. Consequently. and his personal labour investment. an additional goal of this study was to undertake a comparison of outlet profitabilities. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. brand advertising. supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. • Using market-determined rack prices as the basis for establishing petroleum gross product margin and its related revenue. supplier profit: after the above costs are allocated. smaller markets.962 R2 = 0.000. which represents the source of cash flow for three distinct purposes: • • dealer income/profit: the return or salary to the dealer. This study showed that an average outlet net revenue in the 19-market study group was about $70. Relationship of Gross Product Margin to Outlet Throughput (1995) 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Gaspé 16¢ Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 14¢ 12¢ Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4. etc.000.000.6634Ln(x) + 76. and/or distributed to shareholders.6624 1.

by all objective measures available to this study. it was likely due to profitability in the refiner side of operations in the case of integrated refiner/marketers. Although an objective measure of competitiveness is elusive.000) $(300. Average Outlet Income (before marketing overhead costs) BC/PR $300. but that outlets in smaller (Group B) markets had higher outlet incomes than major (Group A) market outlets . suppliers likely incurred a net loss on outlet operations in 1995.000 $50. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. and that petroleum sales revenues alone. or due to lower nonoutlet overhead costs which are likely achievable by regional and independent marketers. 1. distant outlets are clearly higher than those associated with concentrated urban markets.000) $(250.$154. Where the actual corporate results of petroleum marketers showed 1995 profits from their downstream operations. The study showed that the average urban outlet would experience a net loss without the contribution of ancillary operations.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income source: MJ Ervin & Associates The study also showed that very little fundamental difference in outlet profitability existed between regions. was shown to be strongly competitive: MJ ERVIN & ASSOCIATES viii . respectively. rural market outlets were likely to be no more profitable: supplier overhead costs associated with maintaining rural.000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. The Canadian retail petroleum products industry. were insufficient to cover outlet costs.000) $(150. for which this study had no specific data.000 $250. Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector.000 $200. $61. Despite this difference.000 vs.000) $(350.000 per year.000) $(100.market study group.000 $100. at 1995 prices. after allowing for estimated dealer profit and supplier overhead.000 $150.000) $(200.

A long-term decline in pump prices, when measured in constant and nominal dollars, was observed (Finding 10). This has not simply been a result of a decline in underlying raw materials costs; the very margins within which this industry operates has, over the long term, exhibited a diminishing trend (Finding 13). On a national level, in comparing Canada average (city) pump prices to those of the United States, Canadian prices have been at or below US prices in recent years, when taxes were excluded (Finding 14). In comparing several diverse markets, a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18).

These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. Virtually all of the competitiveness indicators examined in this study relate to price. As described in this study however, price is but one of four competitiveness “tools” available to marketers (product, place, and promotions are the other three). Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector.

2. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one.
Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. The study presents such a model, which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement, is mistaken. Rack and pump prices are determined in competitive marketplaces, each with unique dynamics. The resultant margins, which at times can decline to very low or even negative values, are thus a reflection of the state of product supply, demand and other competitive factors existing at the time. In applying such a model to the retail petroleum marketing industry, it is important to understand that, while crude oil markets are considered global in scope and rack product markets are considered regional in scope, retail petroleum markets are considered local (municipal) in scope, since this is the effective range of consumer choice. This implies that the competitive dynamics pertaining to these retail markets can, and do, vary considerably from one population centre to another. Dealers were shown to have a variety of relationships with their supplier; well over half of all outlets in Canada operate as lessees or independents, and accordingly, the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9).

MJ ERVIN & ASSOCIATES

ix

While some markets, particularly smaller ones, experienced higher than average pump prices, when the “outside” factors (tax, rack price and freight cost, for example) were rationalized, the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin, measured against the average outlet throughput for that market. This would entail the tracking of not only pump price, but also rack prices and outlet performance, an exercise that consumers are unlikely to engage in, but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues.

3. Taxation is a significant factor in the price of retail gasoline, and in some markets, presents a competitive disadvantage to Canadian marketers.
This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). By contrast, crude costs accounted for roughly 34 percent (Finding 2), refiner margins accounted for 5.3 cents or 9 percent (Finding 5), and product margins accounted for 3.5 cents, or 6 percent (Finding 6) of the 1996 average regular pump price. Petroleum product taxes are levied at the federal, provincial, and in some markets, municipal levels of government. The latter two can vary considerably from one market to another, and are a predominant cause of inter-regional pump price differences (Finding 16). The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study, but given its magnitude, taxation as an element of public policy is an area worthy of additional research. Due to the localized nature of competition in the retail gasoline marketing sector, taxation differences between Canadian and US markets, or even between Canadian markets with differing tax structures, generally do not serve as competitiveness inhibitors. The demonstrated exception to this is in markets directly adjacent to nearby US markets, but even in such cases, these markets have managed to sustain a certain level of viability and competitiveness. Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world, second only to the United States.

4. Pump price fluctuations can be an indicator of competition in the marketplace.
Demand for gasoline was shown to vary significantly according to the time of year, in a highly distinct, predictable seasonal pattern. Retail pump prices showed a corresponding seasonal pattern, reflecting consumer demand behavior (Finding 15). This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace, which in turn is the principal

MJ ERVIN & ASSOCIATES

x

driver of ex-tax pump prices. Viewed from this perspective, fluctuating prices are a strong competitiveness indicator (Finding 7). Retail pump price changes showed a close relationship to underlying rack prices, which in turn, showed a close relationship to underlying crude prices (Finding 11). Rack prices were shown to not significantly differ between major centres, further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). While price wars are undoubtedly an indicator of competitiveness, the absence of price war activity does not imply a lack of competitiveness. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto, and more price-stable markets such as Sioux Lookout, on the basis of price fluctuation alone. In fact, Sioux Lookout, a price-stable market, exhibited competitive traits typical of any of the study markets, when examined on the margin-volume model.

5. Retail gasoline marketing revenues, on a per litre basis, constitute a small portion of the retail pump price.
The pump price/margin model shows that in 1996, the Canadian retail marketing sector realized an average gross margin of 3.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). This margin represents gross revenue (after wholesale product and freight cost) which, incorporated with ancillary revenues and outlet costs, is available to provide for all retail marketing operations including outlet costs, dealer income, supplier costs and profitability. This consolidated outlet revenue, when distributed these three ways (Finding 20), translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets, and a loss in the case of urban markets, which represent the majority of Canada’s population base. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis, it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution.

6. Declining refiner and marketing margins, have caused, and have resulted from, intense competitive pressures in the downstream industry in general, and the marketing sector in particular.
Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992, despite increases in tax content and crude costs (Finding 12), both of which are beyond the direct influence of Canada’s oil companies. A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin, not price. Since 1991, the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). This trend has both resulted in, and has been a result of, several competitive strategies, including:

MJ ERVIN & ASSOCIATES

xi

although pump prices in some markets can fluctuate by several cents per litre in the course of a week. Industry profitability is extremely sensitive to very small changes in pump price. had petroleum margins which were commensurate with average outlet throughput for that market. A wide range of petroleum gross product margins were evident within the 19market study group. not excessive profits. although this study provides comprehensive evidence of this. despite the predisposition of many observers to use them as such. 7. the rack price basis used in this study may understate actual revenues by about 1 to 2 cents per litre. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). but to increases in underlying rack prices. most markets. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre.• • • improving production efficiency through refinery plant rationalizations (closures). Nevertheless. Indeed. serve as perhaps the most significant indicators of competitiveness in the downstream industry. When these margins were compared to their corresponding outlet throughputs. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. Thus. in the long term these fluctuations are likely more reflective of market restorations. Also. based upon an assumed posted rack price. these findings clearly show that pump price increases are ultimately linked not to increased profits. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. 8. most outlets used in the 19-market study represent major integrated oil companies. It is likely that regional and non-refiner marketers operate with somewhat smaller overhead costs than those used in this study. Thus. and in turn. While these economics might appear to place this industry in a position of poor viability. assuming all other costs were unchanged. crude costs. this industry sector would have realized profits of unprecedented proportions. Thus. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. and the associated industry initiatives which are ongoing in nature. Outlet throughput is a key determinant of inter-market pump price differences. Although some smaller markets appeared to have higher gross MJ ERVIN & ASSOCIATES xii . regardless of size. virtually all of the 19 study markets exhibited similar levels of competition. That such a relationship should exist was not surprising. When plotted against the margin-volume model. Both the downward trend in margins. if Canadian average pump prices were only one cent higher than they were in 1995. Also.

isolated markets face particular challenges: although found to be highly competitive. This created some economic pressure to sell product at a higher pump price. 9. which should. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. • • At first glance. other factors exist which contribute to relatively high margins and prices. poor outlet throughputs were generally the predominant factor. reduce pump prices. The costs of most consumer goods in smaller.product margins than larger markets. A full-serve retail gasoline outlet typically employs 3-5 staff.5 million fewer litres of gasoline than a group A (major centre) station. In suggesting this approach however. Smaller. and this study showed that gasoline prices were no exception. in order to build upon the findings in this study towards a full understanding of the dynamics at work. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. The loss of employment represented by a station closure may be of some concern to smaller communities. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. reducing the number of outlets may also reduce the number of competitors. more isolated markets are generally higher than in larger centres. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. average pump prices were relatively high. the solution would be to encourage some dealers to exit the market. While competitiveness in most smaller markets was shown to be as active as in larger centres. thereby improving petroleum volumes and ancillary revenues at the remaining sites. MJ ERVIN & ASSOCIATES xiii . which could actually inhibit competition. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). there are three points to consider: • • In very small markets. it would seem that if local government in smaller markets were interested in lowering pump prices. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. according to the margin-volume model.

is well beyond the scope of this study. are an acceptable limitation on pure competition (Finding 8). This competition then. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). has seen a decline in pump prices relative to other Canadian markets. will likely preserve a highly competitive petroleum market. that where a healthy competitive climate exists.10. 11. Retail ancillary operations are a critical element of petroleum price competition. the degree of price competition in the retail petroleum has in effect. is both the cause and consequence of increased activity in ancillary operations. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector. This study proposes rather. A full analysis of the various features of the Nova Scotia and PEI regulatory structures. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. as it does in the Canadian petroleum marketing sector. direct regulatory interventions may have an adverse effect on competitiveness. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). The federal Competition Bureau for example. and likely others in Nova Scotia. does not appear to benefit in consumer terms. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. the Halifax market. car wash. Also. and the traditional automotive service bay. characterized by narrow product margins and relatively flat pump prices. Convenience store. and the perceived effect on their markets. depressed petroleum revenues. and in turn. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. as marketers find even more innovative ways to attract market share. sometimes below that of outlet operating costs. As these findings show. and as such. MJ ERVIN & ASSOCIATES xiv . under the current PEI regulatory structure. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. The historical record is clear however: since deregulating pump prices. is viewed as an agency which exists to the benefit of industry and consumer alike. many national and local environmental regulations exist for good cause. Charlottetown. possibly to the detriment of the consumer.

would ultimately be reflected in carefully-considered public policy which serves to truly enhance. petroleum marketing competitiveness. along the lines of the model used in this study. This should be in the form of a quarterly summary of price trends and related measurements. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. A regular comprehensive competitiveness evaluation. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. Improve public understanding and awareness of competition in the petroleum marketing sector.1. • • MJ ERVIN & ASSOCIATES xv . in a simple format designed for consumers and legislators. not inhibit. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. using Canadian and foreign selected markets. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. Public perception measurement. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. 2. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: • Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. using Canadian and foreign selected markets. Develop cooperative industry research into marketing sector competitiveness issues. margins and competitiveness factors. and the nature of competitiveness influences. and the converse image held in much of the public domain. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response.

consumers. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. and issues/opportunities facing such markets. the possible effect of underground storage tank legislation as a potential impediment to market exit and as a competitiveness inhibitor. and regulators alike. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. • * * * Better understanding of this industry. by industry. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue.• Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. and in particular. using Canadian and foreign selected markets. A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy. MJ ERVIN & ASSOCIATES xvi .

.. the Canadian Petroleum Products Institute (CPPI). and . to name a few... and in comparison to the Canadian national average and nearby USA markets”. and regional differences which face the petroleum products retail industry.” An additional study objective was that an assessment of the viability and competitiveness of regional markets be made..to analyze the rack to retail market and the market structure for refined petroleum products.. more detailed economic model of the industry from the rack price point (eg: the refinery plant) to the retail pump.. region by region across Canada. Project Objectives The working group established as the primary objective of this study “. face a number of challenges: a poor public image.to provide a sound database upon which more effective policy decisions can be made.to determine the key factors which drive competitiveness in specific markets. Industry Canada completed a Sector Competitiveness Framework (SCF) for the Canadian refined petroleum products (downstream) industry. including a regional. In 1995..to better understand the competitive opportunities and challenges.. and in the process. The SCF laid the foundation for supplementary studies. provide a model for better understanding the nature of competition and pricing economics within the petroleum marketing sector.to help the industry cope and to enhance competitiveness. which comprise the “downstream” oil industry.” MJ ERVIN & ASSOCIATES 1 .. competitive pressures from US and offshore refiners. The objective of this project was to improve understanding of the issues affecting the long term competitiveness of this industry. and MJ Ervin & Associates was selected to undertake the “rack to retail”. or even communities within the same region.. and a challenging array of potential environmental initiatives.. and Industry Canada was convened to undertake this project. This would have several advantages: it would objectively explain the sometimes significant pump price differences that can exist between regions. .to draw comparisons with nearby USA markets. Specific purposes of this study would be: • • • • “. leading to more effective policies and reduced uncertainty for future investment. . or petroleum marketing portion of the study. and that issues and challenges be identified so that conclusions and recommendations can be made “. A working group represented by Natural Resources Canada (NRCan).Introduction Background Canada’s petroleum refining and marketing sectors.

Unless otherwise stated. Part D: Selected Market Study presents the findings of a diverse 19-market study. all prices and margins referred to in this document are stated in nominal Canadian dollars or cents (ie: not adjusted for inflation). Report Format and Conventions • • • • We have defined terms which may be unfamiliar to the reader. undertaken as part of this project to: • make a more detailed examination of price. through a multi-faceted approach. Part B: Retail Structure serves to provide a general overview of the retail gasoline sub-sector in terms of infrastructure. The study does provide comparisons with US markets on a national level of detail. it provides a comprehensive tool to understand the dynamics of this vital and complex industry. in Appendix I. Ultimately. margins and demand patterns over the past several years. from which some important findings are made. • Part E: Conclusions and Recommendations summarizes the study findings and. and the effect of competitiveness on each subsector. Many of the findings in this report are presented in graphical form. and a foundation for effective policy development. Study Overview This study is in five parts: Part A: Pump Price/margin Model presents a conceptual model for understanding the interrelationship between various subsectors of the petroleum industry. Acknowledgments Three organizations were of considerable assistance in the development of this study: MJ ERVIN & ASSOCIATES 2 . Specific comparisons of specific Canadian and US consumer markets were not made. due to the considerable data gathering difficulties that such an approach would entail.The study meets these objectives. and in order to provide insights into the range of competitive dynamics that can exist. Part C: Historical Trend Analysis provides an overview of prices. an examination of a diverse array of markets in order to determine the degree of dissimilarity or similarity between them. It also relates consumer demand patterns to pump price fluctuations. Supporting data to these charts can be found in Appendix II. or which have a specific meaning in the context of this report. presents conclusions and recommendations which arise from the study findings. Findings are stated in bold and are summarized in part E of this report. margins and related implications for market competitiveness than can simply be provided by existing public-domain data.

Imperial Oil Ltd. including Ultramar Canada. facilitated some of the data gathering needs of this study. CPPI.. and their 481 retail associates whose outlet data was used in our analysis. These included: Canadian Tire Petroleum.. Suncor Inc. Ontario Ministry of Environment and Energy.. Petro-Canada. The Canadian Petroleum Products Institute. Suncor Inc. Petro-Canada. several companies made a significant contribution by providing us with retail outlet operating data used in the selected market study. Environment Canada. through the involvement of Cindy Christopher and Jack Belletrutti (now with CPPI). • • Several organizations participated in two key review sessions. assisted in securing the support and participation of member companies in the selected markets phase of the study. Ministère des ressources naturelles du Québec. MJ ERVIN & ASSOCIATES 3 . through Bob Clapp. Consumers Association of Canada. chaired the steering committee. and Shell Canada. and provided critical guidance and feedback at several key stages in the process. Finally. NRCan. Shell Canada. for their assistance. and also participated in the steering committee. We gratefully acknowledge these companies. Natural Resources Canada.. and Industry Canada. through Maureen Monaghan and Huguette Montcalm.• Industry Canada.

An Overview of the Model Figure 1: Pump Price / Margin Model NOT TO SCALE PUMP PRICE TAX DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE MJ ERVIN & ASSOCIATES 4 . most Canadians relate to this industry in one specific way: as consumers. multifaceted industry. This price/margin model thus creates a common reference for understanding the economics of retail gasoline. To understand competitiveness and pump price economics in the Canadian retail gasoline sector requires a clear understanding of the interrelationships between the principal stakeholders who ultimately share the revenue from the sale of a litre of gasoline. its price. principally of motor gasoline. the particular quality of gasoline which is of most interest to consumers is not its colour. texture. as this study shows. Yet. In fact.price . It is this particular feature of petroleum products . And.Part A Pump Price/Margin Model Although Canada’s petroleum industry is a vast. and serves to explain several factors that together determine retail gasoline prices at any given time. public attention towards the competitiveness of this industry is most focused during a time of gasoline pump price increases. but simply. These relationships can be modeled.which is used by many groups and individuals to assess the competitiveness of the petroleum industry. pump price changes as displayed on the street sign provide no real insights into the factors which drive competitiveness in this industry. or taste. unlike many consumer products. as they are in Figure 1. The interface between each of the stakeholders in this model is defined primarily in terms of the price at which product is transferred (sold and then bought) from one sector of the industry to its neighboring sector.

it is important to define the term “margin”. objective measurement for competitiveness. Competitiveness: The Pump Price Model in Motion EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE One of the key questions this study seeks to answer is “Is the gasoline marketing (ie: rack to retail) sector truly competitive?” As there is no standard. 1 The revenue from a petroleum sale filters down to the principal stakeholders in various ways. This section represents the basic model of pump prices and margins shown in Figure 1 not as a fixed view of what pump prices and margins “should be”. MJ ERVIN & ASSOCIATES 5 . (implying that the stated margin represents net income or “profit”). The revenue from the consumer purchase of a petroleum product (such as gasoline) is split among four key sectors. these stakeholder revenues are derived from the revenue from the retail sale. margins are squeezed or expanded accordingly. Each margin is quantified by its defining prices. Gross margin is simply the difference between two price points. Before examining each of the model elements. is more likely to equate the term with “value for money”. typically the retail price (the price at which the product is sold) less the wholesale price (the price a marketer pays for a product). From an industry perspective. this study’s use of the term relates to gross margin. each essentially taking a share1 . So defined. any operating expenses must then be considered before making any determination of profits.from the total pump revenue.Many of the terms introduced and explained in this section are used extensively throughout this study. consumer perspective. evaluating competitiveness is therefore a partly subjective process. “competitive” may be synonymous with “viable”. A General Definition of Competitiveness Since understanding and measuring downstream industry competitiveness is a general goal of this study. gross margin represents revenue only. While both perspectives are valid. an understanding of the term itself is necessary. While this term is often associated with the phrase “profit margin”. this study examines competitiveness from the latter. Ultimately however. A consumer however.or margin . but as a dynamic model in constant motion: as competitive forces act to move various price points up and down. and in fact inextricably related.

Conditions for a competitive market can be deemed to exist when: • • more than one.” Price Competition in the Oil Industry In order to assess competitiveness. Since a competitive market effectively limits the price option..Unlike many business or economic concepts. if market conditions allow a sufficient number of players to remain profitably engaged.. reducing costs. 1986: “Competition may mean very different things to different people. one must ask how marketers compete. improving efficiencies. They are sources of creative destruction by which monopolies or inefficiencies are destroyed and new entrants and greater efficiency are encouraged. the degree of competition within a market. competitive activity can be observed when a competitor alters one or more of MJ ERVIN & ASSOCIATES 6 . is the only real option in the long term. A useful explanation of competition in the petroleum marketplace was advanced by the Restrictive Trade Practices Commission report “Competition in the Canadian Petroleum Industry” in May. competitors can either restore higher prices or reduce costs. or in other words. represents a process by which prices are set. An effective functioning of markets also permits smaller competitors to expand if they meet the test. Technological change and innovation are the large levers of competition in industry. and at least one of the competitors wishes to improve its revenue by gaining a larger share of the market (profit motive).Competition means therefore an effective functioning of markets which promotes and requires rivalry amongst competitors for the business of consumers. Competition can only be sustained therefore. this usually requires a reasonable number of competitors. To achieve this. This market condition requires that competitors consciously seek to attract business away from each other by price and other means and in turn. and the entry of new competitors and new ideas. Accordingly. More importantly. and ideally many entities offer the same or similar products (brand variety). as competitors seek to attract market share through lower prices. This study therefore attempts simply to identify and illustrate competitiveness indicators which together. in the sense in which it is something in the public interest. such actions by rivals continuously pressure a firm to lower its costs in order that the highest prices the market will permit it to charge enable it to earn a sufficient return of investment to attract investors. in order to maintain some level of brand variety. Simply put. provide some means for comparing the type and to some extent. any attempt at arriving at an objective measurement of competitiveness would be subject to considerable debate. a universally acceptable definition of competitiveness is elusive. In competitive markets the prices of the various competitors inevitably tend toward the same levels because all available cost-savings techniques will be adopted by all the (surviving) competitors. it can frustrate communication and obscure analysis. the result of price competition is reduced profit. The actions by business rivals place an upper limit on the prices a firm can charge for its products.” “. Inevitably. Price competition. and unless care is taken to use the word precisely.

the raw material from which gasoline is made. and in retail markets.44 (1st Dec. competition acts to self-regulate prices in three distinct marketplaces2: • • in crude oil markets. p. Nevertheless. commonly known as the “marketing mix”1. particularly in the crude (upstream) industry and refiner sector. is false. Ill. Place. • Thus described. In fact. and the downstream industry. the “oil industry” consists of two distinct industries: the upstream industry. competition in the crude and rack markets deserves some mention. A refiner in Toronto may well compete with a refiner in Buffalo. some organizations have operations in two or more of these markets. where upstream oil producers compete on a global scale to sell crude oil to petroleum refiners. 4th Ed.: Richard D. and as will become more evident in this study. or four P’s: Product. MJ ERVIN & ASSOCIATES 7 . in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale. which in turn defines a proper market price. but a retail dealer in Toronto is more concerned with the competitive threat posed by other dealers within perhaps a 1 to 2 kilometer radius. in rack markets. where retail gasoline dealers compete on a local scale to sell gasoline to the motorist. While those who reside in oil producing regions such as Alberta often think of the oil industry in terms of crude oil and natural gas exploration and production. and are beyond the scope of this study. The converse notion that the industry establishes a “should be” margin. and a comprehensive description of retail price competition follows: Canada’s Petroleum Industry: Upstream and Downstream The “oil industry” can mean many things to many people. where petroleum refiners compete on a continental scale to sell refined petroleum products (eg: gasoline) to retail marketing organizations. whose main 1 E. and Promotion. It is also important to stress that the market ultimately sets rack and retail pump prices. Jerome McCarthy. 1971). most Canadians relate more in terms of retail gasoline marketing. whose main activity is the exploration and development of crude oil. the most effective of these as a competitive tool is price.. Finding 1: Refiner and Marketing Margins are a consequence of their defining prices. the geographic scale of competition is an important consideration.the variables at their disposal. and are generally known as integrated oil companies. Price. which in turn defines the margins. Irving. New York. The dynamics of upstream and refiner competition are major studies in themselves. Within the broad context of the oil industry. Given the commodity nature of petroleum products. 1960) 2 Although distinct. which focuses more on the infrastructure and mechanisms which promote or inhibit competitiveness at the retail level. (Homewood. Basic Marketing: A Managerial Approach. so a brief description of these.

as a minor contributor to the world crude supply. and refinery production methods. While this study focuses on the downstream industry (and in particular. Competitiveness in Crude Markets The nature or extent of price competition in the crude oil marketplace is a subject of considerable debate. which finds and produces crude oil . it is probably sufficient to say that. it is important to examine its relationship with its neighboring downstream industry. this study uses a fixed percentage of the Edmonton Par crude price as a standard assumption. production. our crude prices rise and fall according to price benchmarks established far beyond our own shores. MJ ERVIN & ASSOCIATES 8 . and transportation of crude oil to the refinery plant. its marketing operations). alongside major producing countries such as Saudi Arabia. Canadian producers must compete to sell their production to refiners. implying that it fluctuates. It is difficult to precisely quantify the upstream “content” in the price of a litre of gasoline.the raw material from which gasoline is made. due to variables such as crude quality. that is to say. Canadian producers have virtually no influence over world crude prices. which it does on a continuous basis. from the exploration for potential crude or gas reserves. drilling.activity is the refining of crude oil into petroleum products. Although this industry is not the focus of this study. which gives an accurate portrayal of month-to-month crude price fluctuations. gasoline grade. in several commodities trading centres around the world. Within the scope of this study. rather than a fixed value. and the delivery and sale of these products to the consumer. Canadian producers are known as “price takers” rather than “price setters” of crude prices. The upstream industry’s crude price is represented in Figure 1 as elastic. Infrastructure The upstream oil industry encompasses a broad range of operations. a brief discussion of its relationship with the upstream industry is useful: Upstream Industry CRUDE PRICE UPSTREAM The starting point of the pump price model is commonly referred to as the upstream industry. and in the open market structure that exists in Canada. In providing historical comparisons of crude to rack/pump prices. Crude oil is a commodity which is traded in a global marketplace. consequently.

its predominant feature is the plant facility which. Some discussion of the interface between refiners and marketers is essential to a full understanding of the marketing function however. who manufacture petroleum products from crude oil. The focus of this study is on the marketing sector of the downstream petroleum industry. From this revenue. Petroleum Refining DOWNSTREAM MARGIN RACK PRICE REFINER MARGIN CRUDE PRICE Within the downstream oil industry there exists two distinct sectors: refiners. MJ ERVIN & ASSOCIATES 9 . buy refined products from the refiner and sell them to the end-use customer. maintenance. and hopefully realize some production. crude is only one of several factors that influence pump prices. and pay out royalties to the resource owner. diesel. in the petroleum sector. A modern refinery is a sophisticated work of engineering. and lubricants. In addition. As is typical of many manufacturing organizations. Infrastructure The petroleum refiner sector represents the manufacturing stage of the life cycle of petroleum products. and from this feedstock. oil producers must explore for potential reserves. heating fuels. and some attention to the refiner sector is therefore given here. and marketers who. involving energy. As a general measure: Finding 2: 1996 average crude price. personnel. Although a description of the process of turning crude oil into gasoline is outside of the scope of this study. was 19. is called the refinery. one of the key attributes of this sector is the very high capital cost of a refinery plant facility: roughly one billion dollars in today’s dollars. as a factor of the regular gasoline retail pump price. or roughly 34 percent of the pump price. put simply. and numerous safety and environmental safeguards.While some suggest that the price of gasoline should rise and fall exactly with the crude price. This sector acquires crude oil. drill for. which in oil producing provinces such as Alberta.1 cents per litre. manufactures a range of refined petroleum products including gasolines. is the provincial government. day-to-day plant operations are cost-intensive.

the gross refiner margin is the price at which the refiner sells its refined product. 1 Dealer Price is not included here. 2 MJ ERVIN & ASSOCIATES 10 . not the refiner sector. a considerable volume of petroleum product must actually trade using rack price as the transaction basis. contract price . which may cause Gross Refiner Margin to be slightly overstated. On a national basis however.the price charged for immediate supply on an “as available” basis. many of which do not have integral refineries. Although contract and transfer prices are distinct from rack price. In fact. the relative competitive strength of any given rack market is difficult to assess. The Bloomberg Oil Buyers’ Guide™ currently lists twenty Canadian rack points. Canadian refiners produced only sufficient product to supply their own networks of retail facilities. Since both crude and rack prices fluctuate according to market forces. since the market-driven rack price provides an objective. the pump price model uses the term “rack price” to refer to the refiner’s sale price of refined petroleum. some clear competitiveness indicators exist.the price charged to a non-refiner marketer (or other sales channel customers) usually under the terms of a long-term supply agreement. less the price at which it bought its raw material2 (rack price minus crude price). the gross refiner margin is elastic. there would be little or no market-driven competitiveness in the refiner sector.Price/Margin Model Elements For simplicity. Of these three refiner prices. transfer price . In simple terms. as this price point exists within the marketing sector. as they relate to negotiated.this is the “internal” price charged by a refiner to the marketing arm of the same company. but with no material effect upon the Gross Product Margin derivation. If for example. and a return on the considerable capital investment in the plant facility. confidential terms between the seller and specific buyers. external measurement of the current market value of a particular petroleum product. While refineries are always rack price points. rack prices also exist at many nonrefining centres where there is sufficient wholesale demand for petroleum product. this model only uses the benchmark crude value. reflecting the cost of transporting the crude from the producing region to the refinery plant. In fact the refiner typically pays a higher price than the benchmark crude price. representing major Canadian population centres. which provides an independent and objective determination of rack-based gross refiner margin. only rack price information is readily available in the public domain. This margin provides for plant operating costs as described above. indicative of a competitive wholesale rack market. Historical data is readily available for crude and rack prices through publications such as Bloomberg Oil Buyers’ Guide™. refiners sell their product under a variety of arrangements. For simplicity. which can be broadly categorized as follows1: • • • rack price . The existence of rack price in a given market is not of itself. For a competitive rack market to exist. Contract and transfer prices are not openly shared. Wholesale volume data is not readily available on a market-specific basis. and accordingly. being squeezed or expanded between these two price points. they use rack price as their basis.

The range of potential refiner sources from which a marketer can choose is largely dependent on the transportation costs involved in bringing the product from the refiner’s rack point (ie: the bulk distribution terminal) to the destination market. to so-called “independent” petroleum marketers. integrated refiner-marketers establish transfer prices at. market-driven Rack (wholesale) pricing of petroleum products. this limits a marketer to a relatively short range (perhaps 1. The mechanisms that drive rack prices are more fully discussed on page 36. As shown in Figure 15 (page 35). even overseas. but where pipeline or marine fuel terminal facilities exist. In practical terms. would produce better than expected refiner income. Integrated Refiner-Marketers In Canada. it follows that: Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive. In examining the structure of the Canadian refiner sector. from any one of several regional refiners. Canadian refiners must therefore be price competitive not only with each other.Competitiveness in the Canadian Rack Marketplace A great deal of Canadian refinery output is sold outside of the refiner’s own marketing infrastructure . to major industrial consumers. who themselves do not refine petroleum products. the question of the internal selling price. but at the expense of marketing income. 1 Based on Octane Magazine Retail Outlet Survey data. many US and European refineries are in practice. and which supply petroleum to about one-third of all retail outlets in Canada1. wholesale refined product is bought and sold across very large distances. arises. for example. or close to. potential sources of wholesale product supply for most Canadian non-refiner marketers. rack prices are also demonstrably competitive in the sense that there is historically a high degree of price uniformity between any two rack points in North America.for example.000 km) for overland truck transport. market-driven rack prices. These independent marketers naturally seek to purchase their product at the lowest available cost (rack price or a negotiated contract price). due to the relatively small transportation cost. In these cases of so-called “integrated” refiner-marketers. most refiners also participate in the marketing and retailing of petroleum products. who compete for a share of this demand. and in the case of gasoline. in order to maintain realistic accountabilities within each of the two sub-sectors. There is no “windfall” profit in setting an unrealistic transfer price: a higher than market transfer price. MJ ERVIN & ASSOCIATES 11 . or transfer price. With a large proportion of the Canadian population within a few hundred kilometers of the United States and/or able to receive marine supply. In practice. petrochemical producers. as there is no obvious market mechanism to regulate its setting. but with their US and European counterparts.

including mining. and purchase at or near the established rack price. product is sold from a central facility. Wholesale Sales to a wide variety of customers. home heating. principally into commercial trucking operators’ vehicles. • • MJ ERVIN & ASSOCIATES 12 . For this reason. Infrastructure Although most consumers associate petroleum marketing with retail gasoline stations. Direct sales consumers do not use the infrastructure associated with the refiners’ own brand. It is this sector which has direct contact with the petroleum consumer and it is this sector. farming. each with its own distinct infrastructure. Retail Sales to the domestic motorist. this study focuses upon price and competitiveness factors that relate to retail gasoline marketing. Within this industry sector. which “sets” the retail price of gasoline. trucking. as detailed in Table 1: • Direct Sales to major customers who generally purchase several million litres of petroleum product annually. or in the case of cardlock facilities. Marketing operations within this sector can be broadly classified into three elements. as a popular and relevant “window” on the petroleum marketing sector. and aviation. Product is either delivered to the customer by the supplier’s (or an associate of the supplier’s) tank truck. and who essentially deal directly with the refiner. media and regulatory attention. gasoline price and competitiveness issues attract considerable public. this is only one (albeit an important one) of several sales channels that exist within the petroleum marketing sector.Petroleum Marketing DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT The petroleum marketing sector represents the final stage of the pump price model. in the minds of many consumers. the most recognized element of the downstream oil industry.

to the aviation fuel consumer. as discussed. often delivered by pipeline or ship/barge.500 retail gasoline outlets in Canada. There are over 850 cardlock outlets in Canada. which primarily serve long-disttance truckers and commercial delivery and haulage operators. at a negotiated contract price. Sales of aviation fuels at major and secondary airports across Canada. There are over 1. Sales of petroleum products through bulk sales outlets. Bulk Sales Home Heating Aviation RETAIL The remainder of this study provides a detailed examination of the retail petroleum products industry in general. as principal elements of petroleum marketing operations. These outlets usually have considerable inventory capacity. by delivery tank truck. and usually supply customers by delivery to the customer’s own storage tank. according to the contractual relationship between the supplier and the dealer. MJ ERVIN & ASSOCIATES 13 . Sales to spot buyers at posted rack price. Sales of home heating fuels to residential furnace oil customers. in smaller centres. typically at the “rack point”. Primary Brand Second Brand Retail gasoline sales through the principal brand name associated with the supplier. for example. such as product transport and/or storage. In major centres dedicated Home Heat centres provide this service. The name “cardlock” refers to the coded access card which the customer uses to activate the fuelling pump at the outlet. Direct sales generally do not involve any marketing sector infrastructure. Retail outlets are operated in a variety of modes. Cardlock Sales of petroleum products through a network of consumer-operated fuel dispensing facilities. Sales of petroleum products (principally gasoline) through retail gasoline outlets. usually involving some aspect of the marketing sector infrastructure. which is generally less than the rack price. to the motorist consumer. There are about 16.300 bulk sales outlets in Canada. Before examining this sector in detail. Some larger petroleum marketers also operate a network of retail outlets which are identified with a different brand than the primary.Table 1: Downstream Sales Channels Sales Channel DIRECT SALES Major Industrial Spot Rack Contract Supply WHOLESALE Infrastructure Description Sales to major accounts. one final element of the pump price model must be reviewed. using delivery tank trucks. Sales to major industrial accounts. Sales to non-refiner petroleum marketers. and regular gasoline in particular. Sales to commercial and industrial accounts by the wholesale marketing sector. heating fuel delivery is an integral part of a bulk sales outlet.

municipal taxes. Table 2 shows the provincial tax content for retail gasoline. for example. stable amount. MJ ERVIN & ASSOCIATES 14 . this decrease is reflected in a reduced gross product margin the tax content stays essentially the same1. 1995 product taxes on retail gasoline alone represented approximately 9 billion dollars in federal and provincial government revenues.2 cent (0. which amount to 28. provincial sales tax. 1 Due to the application of GST (and in Quebec.Taxation on Petroleum Products PUMP PRICE TAX EX-TAX PUMP PRICE Unlike gross product margin. tax content does fluctuate somewhat with pump price changes.6 cents per litre (Canada 1996 10-city average). The petroleum industry acts as a collector of these taxes. would include a roughly 0. PST). the tax content of the petroleum price is essentially a pre-determined.3 in Quebec) drop in the tax content. and seven percent GST. A three-cent drop in pump price. typically made up of: • • • • a ten cent per litre federal excise tax. in a small number of markets. As part C of this study shows. the tax content of retail gasoline in Canada has increased steadily over several years. or roughly 50 per cent of the pump price. If the pump price decreases for example. regardless of market conditions.

0 16. MJ ERVIN & ASSOCIATES 15 .3 Federal Excise Tax 10.2 24.0 GST content (7% of pump) 3.6 3.0 9.0 4.0 10.0 10. 1996 (City)Province BC (1) Alberta Saskatchewan Manitoba Ontario Quebec (2) New Brunswick Nova Scotia PEI Newfoundland Yukon NWT Canada Ave.1 25.5 Total Tax 24.5 3.7 30.5% sales tax applied to the GST-inclusive pump price.6 3.6 3. plus a 6.2 cent per litre pump tax.0 28.7 13.2 24.0 28.6 25.5 14.0 27.7 3.0 10.0 10.1 32. Provincial Tax 11. An additional pump tax of 1.0 10.6 22.6 3.3 10.0 10.0 3.0 10.0 cents is charged in the greater Victoria and Vancouver areas respectively.2 10.4 3.9 3.0 3.8 note 1 note 2 An additional tax of 1.0 10.Table 2: Taxes on Regular Gasoline on December 31.5 cents was introduced in the Montreal and surrounding area in 1996.5 6.7 18.3 20.0 10. All Quebec gasoline sales are subject to a 15.8 4.0 14.0 10.0 15. Quebec pump taxes are reduced by varying amounts in certain remote areas and in markets within 20 kilometers of provincial or US borders.0 10.5 cents and 4.0 11.5 12.0 10.3 27.

the brand supplier’s costs. Figure 2: 1996 Average Prices/Margins . and ancillary operations. MJ ERVIN & ASSOCIATES 16 .4 ¢ 19.5 cents per litre (after freight cost).1 ¢ 5. to derive a representative value for regular gasoline gross product margin in Canada.6 ¢ EX-TAX PUMP PRICE RACK PRICE DOWNSTREAM MARGIN MARKETING MARGIN REFINER MARGIN UPSTREAM PRODUCT MARGIN FREIGHT 3. and the retail gasoline sub-sector in particular. or 9 percent. and potentially. The residual.Part B The Structure of the Retail Petroleum Products Sub-Sector While part A of this report established a conceptual framework of Canada’s petroleum industry. Pump Price/Margin Model: An Integrated View Having reviewed each of the four key pump price/margin model elements.3 ¢ CRUDE PRICE source: Natural Resources Canada • • • • Tax accounted for 28.1 cents per litre. was available for product marketing operations. Figure 2 integrates the pump price model with NRCan 1996 regular gasoline product prices (10-city average).3 percent of the average regular gasoline posted pump price. 3. This 1 Prices and margins reflect a Canadian 10 city average.5 ¢ 0. some profit return for the shareholder. namely the dealer’s costs and income. or 34 percent of the pump price. this section provides a view of the Canadian petroleum marketing sector. including retail outlet distribution.Regular Unleaded1 NOT TO SCALE PUMP PRICE 56. Upstream operations realized 19.2 ¢ 24.3 cents per litre. based on regular unleaded gasoline.8 ¢ TAX 28. Refiner operations realized 5. or 50. operating modes. It also provides an overview of the industry in terms of several infrastructure parameters.3 ¢ 28.6 cents per litre.

was 5. is usually the gas station. the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market. It is this sector which provides the entire infrastructure for bringing refined petroleum products from the refinery plant facility to the ultimate end-use consumer.gross product margin represented 6 percent of the Canadian average regular gasoline pump price. Freight MJ ERVIN & ASSOCIATES 17 . and is then transported to the retail outlet. Although many petroleum marketers conduct their own freight operations. for example) is sold/transferred at the current rack or transfer price. and it is depicted in Figure 1 as a fixed cost element. Bloomberg rack price values were used as the assumed wholesale price. is defined by the marketdriven price points of ex-tax pump price. See page 10 for further explanation.5 cents per litre. In 1996. this is seen as a “non-core” business. the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline. The gross marketing margin. the finished product (gasoline. Finding 6: Marketing Sector Overview DOWNSTREAM MARGIN EX-TAX PUMP PRICE RACK PRICE MARKETING MARGIN PRODUCT MARGIN FREIGHT Once the refiner has completed its work. which in the case of retail gasoline. and is often out-sourced to third-party common carriers. This margin represents the revenue which provides for two key operations: • Freight: Freight (or distribution) is the transportation of petroleum products from the rack or refinery point to the final point of sale. Freight cost does not typically fluctuate. three key findings can be stated: Finding 4: Finding 5: In 1996. petroleum taxes accounted for 50. Based on the 1996 data. and rack price. In 1996.3 cents per litre. as part C will describe. As the product leaves the refinery plant. Both refiner and marketing margins have been in decline over the past several years. it falls into the domain of the marketing sector. In referring to marketing margins and product margins.3 percent of the average urban price of regular gasoline in Canada. is the second of two elements of the downstream oil industry. The marketing sector then. or “rack to retail” margin. was 3.

8¢ Pump Price) Upstream Operations 19. Unlike most other retail enterprises however.3¢ 3.3¢ source: Natural Resources Canada The determination and comparison of gross product margins in selected markets is a key objective of part D of this study.6¢ Refiner Operations 5. rural markets experience higher pump prices than do larger centres. which are typically close to a wholesale rack point. Grade Differentials Most of the Canada average product prices cited in this study refer to regular unleaded gasoline (RUL). an average gross product margin for regular gasoline in a major Canadian city was 3. As represented in Figure 3. and is therefore a poor comparative tool. Posted pump price includes all of these variables. together with gas station dealers. and upstream/refiner margins. typical of any retail business. as it excludes the “outside variables” of tax.costs are generally less than one-half cent per litre in most major Canadian cities.000 per outlet.5¢ Product Operations Freight 0. storing and dispensing a product such as gasoline adds considerably to the operating cost. This is a particularly useful measurement in comparing retail gasoline markets. as it represents 80% of all retail gasoline sales. Figure 3: 1996 Average Regular Gasoline Margins (56. Modern pump and underground tank installations have greatly reduced the environmental and safety concerns associated with petroleum products. but at an average cost of over $200. but can be as high as 3 to 4 cents in markets more distant from the refinery point: this partially explains why some small. • Product sales: Within this domain. Gross product margin is therefore defined as gross marketing margin less freight cost.5 cents per litre in 1996. petroleum marketers. freight.1¢ Tax 28. incur a variety of costs. Midgrade and premium grades (which have a higher octane content) represent 5% and 15% of MJ ERVIN & ASSOCIATES 18 .

Place. Competitiveness in the Retail Gasoline Sub-Sector Retail Competitive Practices and Indicators A retail gasoline marketer competes at many levels: At a general level. Price. Irving. as gas stations proliferated.” or four P’s: Product. but most consumers view gasoline as a commodity. Specific competitiveness indicators relating to product would be: • • • introduction and promotion of gasoline grade features such as octane content. 1960) MJ ERVIN & ASSOCIATES 19 . Place Typically. gasoline). and confines itself to the more specific (and popular) issue of brand competition for retail gasoline. This study does not examine such a broad issue however.: Richard D. 4th Ed. marketers have attempted with some success to differentiate their product offerings from other brands. (Homewood. competitive strategy of this type focuses heavily on selecting the best place. and the price difference between these grades and the RUL price is referred to as the grade differential. Although revenue from this product is factored into the study market economics in Part D. and 9 cents per litre for premium gasoline. page 24). it represents a very small percentage of total retail petroleum sales.. Prices for midgrade and premium grades are established in the same way as RUL prices: through competitive activity. a number of factors preclude this type of strategy. propane vs. 2 E. commonly known as the “marketing mix2. 1 Diesel is another petroleum product sold at many retail outlets. RUL prices are therefore most often cited when relating historical price trends. and Promotion. In the 1960’s and 1970’s this type of competitive activity was evident in the retail gasoline sector. In order to measure competitiveness. This has resulted in a decline in the number of retail outlets in the past two decades (Figure 5. Environmental concerns and associated costs have dictated greater selectivity in developing new sites. and accordingly. • Product In the past decade. Examples of competitiveness relating to place include: • opening new or upgrading existing facilities. seasonal blends. expanded product/services offerings such as convenience items. Ill. A portion of the market certainly responds to this type of competitive strategy. but in 1995 was typically 5 cents per litre for midgrade. one must ask how marketers compete. marketers compete to be represented in as many and/or the best locations as possible. etc. rather than the most places. Jerome McCarthy. Simply put. Basic Marketing: A Managerial Approach. Today. Today.retail gasoline sales respectively1. or when comparing price levels between markets. Higher octane grades are more expensive than RUL. Price competition has forced marketers to optimize outlet revenue. competitive activity can be observed when a marketer alters one or more of the variables at their disposal. The grade differential varies somewhat from city to city. 1971).44 (1st Dec.). additives. will ultimately purchase based on price. marketers compete for the consumer’s choice of transportation energy (for example. p.

price has proven to be the most widely used competitive tool by gasoline marketers. is less clear. low prices and/or margins. volatile pricing manifests itself in the form of a price war (see below). This study therefore focuses on the nature of product price as a measure of competitiveness in the Canadian “rack to retail” sector. In this context. • Price In most markets. As such. Establishing an objective measurement of price as a competitiveness indicator however. caused by price competition. fluctuating pump prices are a significant indicator of robust competition among marketers.contrary to some public perception. and due to the already slim margins available to marketers. gasoline is viewed by consumers as a commodity uniform in quality and widely available. Examples are: • prominently displayed prices . Examples of promotional competition are: • • • brand identity gasoline discount coupon. this study examines the dynamics of price competition in considerable detail. Promotional activity seems to have decreased in the past few years. Consequently. it is useful to address some of the general competitive mechanisms behind these particular competitiveness indicators. This study presents an extensive historical and comparative analysis of pump prices. probably due to its relatively high cost. in fact it is indicative of some consumer perception that one brand of gasoline is essentially the same as the next. price clearly remains the predominant competitive tool used by Canadian gasoline marketers. and more importantly. At its extreme. MJ ERVIN & ASSOCIATES 20 .that pump prices are almost universally displayed on highly visible outlet billboards is indicative of the importance of price as a key selling feature. gasoline is a commodity. volatile prices . • • • While examples of all of these indicators are abundantly in evidence. due to the largely commodity nature of petroleum product.while uniform pump prices are sometimes cited as evidence of industry collusion.• • closure of non-viable outlets. free item with purchase or special price item with purchase. uniform prices . their subsector margins. Promotion In the gasoline retailing sub-sector. and therefore “trades” within a relatively narrow price range. Price Uniformity and Volatility As the degree of price uniformity and volatility in the retail gasoline sub-sector is often perceived as synonymous with its competitiveness. promotion strategies generally attempt to provide the consumer with added value without resorting to pump price reductions.

competitors will likely match this price. since there is no “dealer margin”. or when prices rise or fall apparently in unison. Finding 7: Price uniformity and price volatility. for example). bypassing the higherpriced outlet. But if the pump price increase is a reasonable reflection of the underlying change in gross product margin.where the ex-tax pump price is equal to. but to competitors. the effect on many consumers is immediate: they will drive into that station. While this support may take one of several forms. and gasoline is perhaps the only consumer product in Canada that is so consistently advertised in this way. The other dealer has little choice but to quickly match. adjacent dealers. since they too must restore their gross product margins to sustainable levels. the supplier may temporarily intervene. assuming that the rack price is unchanged. To understand the phenomenon of uniform pump prices. in order to maintain a reasonable market share. Price Support In times of “normal” pump prices. facilitated through street price signs. in an attempt to gain market share. If the posted price increase is too high. gross product margin will eventually diminish to a point that is not viable for a majority of competitors. Pump prices therefore tend to move uniformly within a very short time. When this occurs. This is a misconception. it is often cited as evidence that marketers engage in direct communication to “fix” prices at an agreed-to level. 1 This does not occur at company operated or commission outlets. one must adopt the perspectives of both consumers and competing. The effect of this upon the gross marketing margin is obvious: it is squeezed. competitors may not follow. the wholesale rack price. or even being squeezed to zero . are indicators of a competitive market. In the case of lessee or independent dealers however.When pump prices are uniform. Pump price signs are an ubiquitous feature of the retail gasoline industry. MJ ERVIN & ASSOCIATES 21 . or even less than. or even undercut the competitor’s lower price. who then react quickly to the change. A common factor in both falling and rising prices is the posted price sign: it is this device that instantaneously communicates pump prices not only to consumers. One of these competitors will be forced to make a difficult decision: to be the first to raise pump prices in order to restore gross product margins to a viable level. Whether through falling pump prices or rising rack prices. and provide to the dealer what is commonly referred to as price support. its effect is to restore some measure of the dealer margin. There have been examples of this margin being squeezed to a point that is insufficient to cover operating costs. obviously at the expense of the supplier margin. the relationship between the supplier and dealer is generally as described on page 25. This price lowering mechanism may sometimes result in a “price war” if each competitor continues to undercut the other. there are times (during a price war in particular) when the retail pump price may fall to a level that provides the dealer with an insufficient margin1 to meet operating costs. If one dealer decides to reduce pump prices (by two cents.

In addition. A review of historical retail pump prices in the Halifax. 1997 MJ ERVIN & ASSOCIATES 22 . and a brief discussion of this case appears in part D. is beyond this study’s scope. Conspiracy: where several competitors act to fix prices for the purpose of reducing competition. Following a year-long investigation. but reverts back to the dealer when the support arrangement is ceased. The outcome of the RPTC study can generally be characterized as acknowledging that a healthy state of competition exists in this industry. the petroleum marketing sector has been the subject of several inquiries at federal. 1 Competition Bureau press release “Gasoline enquiries find no evidence of anti-competitive behavior” dated March 18. More recently. resulting in 9 convictions. most with the general mandate of examining the “fairness” of competition and pump pricing among petroleum marketers. which is administered by the federal Competition Bureau (Industry Canada). or of direct government intervention in marketing. The Bureau enforces provisions of the Act which prohibit: • • • • Abuse of dominant position: where a firm (or several firms in collaboration) uses its market power to lessen competition. the Bureau found that there was no evidence to support these allegations1. Nova Scotia market may provide an example of the potential negative consequences of direct intervention. These cases have largely involved local dealers and/or isolated incidents. provincial and even municipal levels. An examination of the effect of the Competition Act. While this study does not intend to undertake a detailed review of the effect of the Act. however. the Bureau investigated four well-publicised allegations of anti-competitive behavior on the part of major oil companies in the spring and summer of 1996. There are few current examples of direct government intervention in the pricing of petroleum products. In addition. in the past twenty-five years the Bureau has prosecuted a total of 11 violations within the Canadian retail gasoline sector. Price maintenance: where a supplier exerts upward influence on prices upon a dealer. Quebec has recently passed legislation which prohibits the selling of (retail) gasoline or diesel at a price which is lower than the (wholesale) cost to a retailer in any trading “zone”. control over retail pump price effectively reverts to the supplier. Prince Edward Island is the only province which directly regulates gasoline and fuel oil prices.Under the provisions of some price support mechanisms. Perhaps the most notable of these was the 1986 Restrictive Trade Practices Commission (RPTC) study “Competition in the Canadian Petroleum Industry”. Price discrimination: where a supplier charges different prices to competitors in the same market who purchase similar volumes of products. Price Competition and the Regulatory Process All retail competitiveness in Canada comes under the purview of the Competition Act.

that is. or inhibiting. policy or regulation can be deemed to be a competitive factor if it: • • • • creates an obstacle to. improves or reduces a “level playing field” in terms of the ability of one market to compete with another on the basis of price or operating costs. Retail gasoline sales. Many smaller retail owner-operators.Competitiveness Factors (Drivers and Inhibitors) Competitiveness factors can be defined as those forces which act upon the industry to increase (drive) or decrease (inhibit) competitive practices. creating a need for higher margins. may find it more attractive to continue operating a marginally viable gasoline outlet than facing the cost associated with the removal of inactive tanks and/or potentially contaminated soil. entry into an attractive market.500 retail gasoline outlets across Canada. Conversely. A practice. creates an obstacle to. MJ ERVIN & ASSOCIATES 23 . but exist to meet other important societal needs. sales of gasoline through the roughly 16. and at least some of this capital cost is regulatory compliance-driven. higher pump prices. accounting for roughly 88% of all gasoline demand. As a product group however. The high cost of building a modern retail gasoline outlet for example. promotes or limits market-driven pump prices. a competitive climate. inhibit competition. This issue is discussed more fully in part D. in the form of standards for the decommissioning of retail petroleum sites. So defined. to some degree. it is the single largest one. This may have the effect of reducing volume and revenue potential at other retail sites in the vicinity. and is the single largest market for gasoline products. or incentive for. but the considerable investment represented by a modern retail outlet has the effect of limiting market entry to those with sufficient capital to put at risk. These regulations clearly exist to the benefit of all. is in part. accounting for 41% of all petroleum demand. Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature. It is important to acknowledge that many regulations affecting the retail gasoline industry. a consequence of regulations which stipulate minimum standards for the design and construction of petroleum storage tanks. particularly in smaller population centres. accounts for about 37% of all refined petroleum demand in Canada. or incentive for. Retail Gasoline Demand Gasoline is but one of many products produced by the Canadian downstream industry (Figure 4). it is clear that government policy plays an important role in facilitating. as outlined above. one can cite examples of regulatory obstacles to exit from the retail gasoline market. for safety and environmental protection. exit from an non-viable market. and consequently.

452 Million Litres source: Statistics Canada (Cat# 45-004) National Retail Petroleum Outlet Representation The most frequent source of information on the population of retail gasoline outlets in Canada is the Octane Magazine Annual Retail Survey.9% PetroChem Feedstocks 5. nor is there any federal or uniform provincial enumeration of retail gasoline outlets.3% Total Sales Volume: 84.6% Other Gasoline 4.Figure 4: 1995 Refined Petroleum Products Demand by Product Category Naptha/Avgas/ Stove/Kero 6. as shown in Figure 5.2% Retail Gasoline 37.2% Other 0.2% Asphalt/Coke 4.2% Propane /Butane 2. This study provides an estimate of the actual retail outlet population.1988-1995 24000 22000 Estimate of Actual Outlet Population 20000 Octane Magazine Survey 18000 16000 14000 1988 1989 1990 1991 1992 1993 1994 1995 source: Octane Magazine (estimate by MJ Ervin & Associates) MJ ERVIN & ASSOCIATES 24 .7% Lube/Grease 1.9% Diesel Fuel 22. Figure 5: Canadian Retail Outlet Population . This survey accounts only for major established retail networks .7% Light/Heavy FuelOils 14.it has no practical means to enumerate each and every outlet.

as owner of the product. who holds initial title to the refined petroleum as it leaves the rack point. and usually owns the brand name seen at the retail outlet. Several possible relationships. The supplier. the retail outlet is owned and operated entirely by the product supplier.The estimated number of retail outlets in Canada has declined from 22.000 outlets in 1989. and this is of some importance with respect to the matter of prices and competition in this sector. or modes.513 723 source: Octane Magazine Retail Petroleum Outlet Modes The retail gasoline marketing infrastructure is much more complex than represented in Figure 1. as one might expect. using Octane counts only) is roughly equivalent to population densities. There are two main stakeholders involved in the marketing of retail gasoline: the supplier. Figure 6: 1995 Retail Outlets by Province PE 136 Northern Canada 65 576 NF 711 657 NS NB QU 3777 1610 BC 1716 AB SK 911 MB ON 3631 Total = 14.500 in 1995. to about 16. exist between retail dealers and their suppliers. who manages the day-to-day operations at the retail outlet. The principal dealer and attendants are salaried employees of the supplier. and all inventory and revenues belong to the supplier. Company Operated MARKETING MARGIN PRODUCT MARGIN = BRAND SUPPLIER MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. Distribution of these outlets by province (Figure 6. Company Operated outlets have no MJ ERVIN & ASSOCIATES 25 . and the dealer. controls the setting of the pump price.

the supplier retains control of the retail pump price. but the outlet operator (“dealer”) is compensated by a commission payment.the entire gross product margin accrues to the brand supplier. Since the supplier owns the petroleum product at this type of outlet. an employee of the supplier supplier supplier typically the dealer. the outlet facilities and petroleum inventory is owned by the supplier. who may pay the supplier a lease fee for the use of merchandising space 26% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In the lessee mode. usually based on cents per litre of petroleum sales. and pays them from his commission revenue. who pays all outlet operating costs. The “dealer” is in essence. supplier salary from supplier.sub-component margins . the “dealer” is actually an employee of the supplier supplier supplier typically the supplier 15% Control of Pump Price Dealer Compensation Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Commission Operator MARKETING MARGIN PRODUCTCOMMISSION EXPENSE MARGIN FREIGHT EX-TAX PUMP PRICE RACK PRICE In this mode. The dealer in turn hires attendants. Control of Pump Price Dealer Compensation supplier a commission from the supplier. the supplier typically owns/controls the principal outlet facility which in turn is leased out to the dealer or lessee. based on pump sales volume. The lessee purchases petroleum MJ ERVIN & ASSOCIATES 26 .

since it is predicated on contractual arrangements between the dealer and the supplier. Control of Pump Price Dealer Compensation dealer dealer buys product from the supplier. The margin between these two prices is the dealer’s gross revenue. can vary considerably from one supplier to another. MJ ERVIN & ASSOCIATES 27 . The dealer pays most or all of the expenses associated with operating the outlet. The distribution of retail outlets by mode has some important implications concerning the nature of gasoline pricing and competition. Control of Pump Price Dealer Compensation lessee lessee buys product from the supplier. and sells at the posted pump price. and means of compensation supplier. This dealer margin is defined as the pump price (ex-tax). less the Dealer (wholesale) Price charged by the brand supplier. This Dealer Price. and in turn resells to the motorist consumer at a higher pump price established by the lessee. and has control over the retail pump price. and means of compensation dealer dealer dealer 45% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Lessee or Independent outlets are the only modes in which a true dealer margin exists.product from the supplier at a “Dealer Wholesale” price. and sells at the posted pump price. who may pay the supplier a lease fee for the use of merchandising space 14% Ownership/control of outlet site Ownership of petroleum inventory Operation of Ancillary Services Percentage of all outlet modes Independent Dealer EX-TAX PUMP PRICE MARKETING MARGIN PRODUCTDEALER MARGIN MARGIN BRAND SUPPLIER MARGIN FREIGHT DEALER PRICE RACK PRICE In this mode. The dealer buys the petroleum product at a Dealer Wholesale price and in turn resells to the motorist consumer at a higher. who would typically charge a lease fee to the dealer for the use of the facility lessee typically the lessee. the retail facilities are owned by the dealer. The margin between these two prices is the dealer’s gross revenue. not the supplier. dealer-established retail price. unlike rack or pump prices.

who themselves establish pump prices. This is significant: dealers who operate as lessees or independents are directly responsible for deciding upon the retail pump price. This further limits the direct influence that a major oil company might have upon the Canadian retail marketplace.Figure 7 shows that of all retail outlets in Canada less than half operate as company or commission dealers. during a price war) as previously described. and fully two-thirds operate as lessees or independents. While a complete discussion of average throughputs in typical Canadian markets will take place in part D of this study. Roughly half of all retail outlets in Canada represent a major integrated oil company (Shell. There is some evidence that there is a higher percentage of lessee and independent outlets in smaller markets than in large population centres. In addition. The remainder represent one of over 50 different marketer organizations. It therefore follows that no single oil company has a position of absolute dominance over the Canadian retail gasoline sector. Figure 7: Outlet Representation by Mode 16000 14000 12000 10000 8000 6000 4000 2000 0 Total outlets Major integrated Others 2235 3821 Company Operated Commission Dealer Lessee Independent 2022 9 2061 1059 Company Op 2226 1760 963 2298 6435 4137 source: Octane Magazine Outlet Throughput A key measure of outlet performance and viability in the downstream industry is the monthly or annual outlet throughput of petroleum products. virtually none of the major integrated outlets are company operated. 1 Unless the dealer is under a price support arrangement (for instance. some general figures are mentioned here. Petro-Canada. It follows that pump prices tend to be somewhat more directly controlled (ie: at the local community level) in smaller markets than in larger markets. or Imperial Oil). MJ ERVIN & ASSOCIATES 28 . Therefore: Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada1.

Figure 8: Outlet Representation by Service 4000 3000 2000 1000 0 Car Wash CStore Kiosk Propane Service Bays source: Octane Magazine MJ ERVIN & ASSOCIATES 29 . In effect. the revenue from so-called ancillary services is an increasingly essential element of retail gasoline marketing. ancillary service has had the consequence of subsidizing the pump price of gasoline. and is a result of. who may pay the supplier (who is typically the owner of the facility) a lease or franchise fee for the use of the retail space. Canadian throughputs have dramatically improved in the past several years . In fact. feature both a large-area convenience food store and a modern car wash facility. The proliferation over the past two decades of ancillary services such as convenience stores and car washes. Most ancillary services are operated by the dealer/lessee. Figure 8 depicts the Canadian representation of several key ancillary services. Ancillary Services Very few if any retail gasoline outlets limit their product offerings simply to gasoline. has had a profound effect on the retail gasoline marketing sector. average annual throughputs ranged from under 1 million litres in smaller population centres. these study findings show that this can vary widely from market to market. These improved outlet throughputs have provided for improved petroleum revenue potential. more fully described in part C. to over five million litres in major markets such as Toronto.While an average outlet throughput may be in the order of 2.a result of significant retail outlet rationalizations (see Figure 5) which the petroleum products industry has undertaken. Many outlets have more than one ancillary offering: many “flagship” outlets for example. reduced petroleum margins.5 million litres. Based on a sampling of outlets surveyed in this study. which in part has led to a reduction in retail product margins. Improved outlet revenue from ancillary operations has caused.

Gasoline and the Consumer Price Index A common perception among consumers is that gasoline prices are steadily rising. an examination of the specific historical record of gasoline prices is useful. when the Persian Gulf War caused crude prices to increase significantly. in nominal (actual) and constant (inflation adjusted) dollars from 1986 to 1995. An “all markets” average. the “Canada average” price reflects an average of urban markets only1. This shows that pump prices have increased in nominal terms. Since 1 Data is not regularly collected on smaller markets. as can be seen in part D of this study. would be somewhat higher. using a Canada 10city weighted (by provincial demand) average. many utilize terms which are explained in part A. This part examines broad trends in several areas. particularly around 1990. and with which the reader should be familiar. including smaller markets. Figure 9: Annual Gasoline Price (Cents per Litre) 60¢ Nominal 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Source: NRCan 15¢ 1986 1987 1988 Including Tax Constant $ Excluding Tax Nominal Constant $ 1989 1990 1991 1992 1993 1994 1995 source: Natural Resources Canada / Statistics Canada Figure 9 shows the Canadian 10-city average regular gasoline pump price.Part C Historical Trend Analysis This part of the study examines several historical price and margin trends in the Canadian retail gasoline sector. mainly using Canada average values. Since rising prices are common to most consumer goods and services. Regional and market-to-market comparisons are presented in greater detail in part D. MJ ERVIN & ASSOCIATES 30 . Unless noted. As such. prices are for regular unleaded (RUL) gasoline. While some of the presented findings are selfexplanatory.

Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years. retail pump prices were about 7 cents less in 1995 than they were in 1986. In constant dollars. gasoline prices have had a mitigating effect on the Consumer Price Index (commonly referred to as the CPI or inflation rate). nominal pump prices decreased. both nominal and constant dollar prices are less in 1995 than in 1986: the constant dollar price of gasoline declined by 10 cents per litre from 1986 to 1995.1990. as defined in part A of this study. rack price.Selected Goods & Services 180 170 160 150 140 130 120 110 100 90 80 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 Gulf War pushes crude oil prices upwards in 1990-91 Annual Averages. 1986 = 100 Source: Statistics Canada Cat 62-010 Domestic Water Domestic Electricity Alcoholic Beverages Auto Repairs All Items Gasoline Fuel Oil Food Natural Gas Telephone Service source: Statistics Canada Key Price History Figure 11 depicts the history of Canada (10-city) monthly average regular gasoline pump prices. and there appears to be no lead or lag in the timing of pump price fluctuations relative to rack price changes. When compared to other consumer goods. It also depicts the associated margins. Several observations can be made from this: • • • • fluctuations in average rack prices have closely followed changes in underlying crude costs. fluctuations in average pump prices (ex-tax) have closely followed changes in underlying rack prices. and relative crude cost. MJ ERVIN & ASSOCIATES 31 . ex-tax equivalent prices. Figure 10: CPI Index Comparison . as in Figure 10. there appears to be little or no lead or lag in the timing of rack price fluctuations relative to crude price changes. When pump prices are reduced by the amount of tax content.

it simply passes on a fixed cost margin to determine the “correct” pump price. and the rise in the tax content. the following is evident that: Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products. and in fact have displayed a declining trend over the past six years. then one might expect margins to be quite constant over time. From Figure 11 it can be seen that urban retail pump prices declined somewhat from 1991 to 1994. the presence of these additional market factors have operated to the benefit of consumers. MJ ERVIN & ASSOCIATES 32 . as Figure 11 shows. due to additional market factors which affect pump and rack prices at any given point in time. that is. nor do rack prices exactly follow crude costs. Figure 12 shows that industry margins have not been constant over time. are principally a reflection of changes in the underlying price of crude oil. This recent rise in pump prices is attributable to two factors: • • the rise in crude costs in this period. as shown in Figure 12. In fact. it is also useful to examine the behavior of margins. If. and have risen slightly since 1994. which in turn. the downstream industry operates on a “cost-plus” basis. Margin History While Figure 11 provides an indication of key price trends. as might be suggested. which are defined by the price points.Figure 11: Monthly Prices 1990-1996 (Nominal $) 70¢ Pump Price (Canada Average) 60¢ 50¢ Cents per Litre Pump Price excluding tax Tax Content 40¢ Rack Price (Canada Avg) Downstream Margin 30¢ Marketing Margin 20¢ Refiner Margin Crude Price 10¢ Jul-90 Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-90 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-96 source: Natural Resources Canada From these observations. It is important to state that pump price changes do not occur in exact lock-step with rack prices. as the next section shows.

the actual fluctuation is much more pronounced than shown. while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. Finding 13: From 1991 to 1996. The decline in refiner and marketing margins has both resulted in. as local competitive factors act to self-regulate pump prices. since the chart is based on monthly averages. A more thorough discussion of specific market factors for these and other centres appears in part D. compared to the Canadian average. Regular Gasoline Downstream (Marketing + Refiner) Margin 15¢ 10¢ Refiner Margin (rack . 1 In fact.rack) Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 0¢ source: Natural Resources Canada Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs. the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre. and has been a result of. including: • • • improved refinery efficiency as a consequence of plant rationalization and a modest demand increase. Figure 13 is a comparison of regular gasoline gross marketing margins from 1991 to 1996 for selected centres. MJ ERVIN & ASSOCIATES 33 .crude) 5¢ Marketing Margin (retail . several factors. In particular. not weekly or daily data. which have both shown a consistent decline throughout the period 1991 to 1996.Figure 12: Monthly Margins 1991-1996 (Nominal $) 30¢ Tax Content 25¢ 20¢ Canada Avg. improved retail outlet performance as a consequence of higher throughputs due to outlet rationalizations (closures) and demand increases. this upward trend is not attributable to “downstream” refiner or marketing sector margins. This shows that on a monthly basis. the gross marketing margin can fluctuate quite significantly1.

Figure 14: Canada / US Monthly Pump Price (Nominal $) 65¢ 60¢ 55¢ 50¢ Price per litre 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ Apr-93 Oct-93 Jan-93 Jan-94 Jul-93 US Pump Price (Cdn ¢/l) Apr-94 Apr-95 Apr-96 Oct-94 Oct-95 Jan-95 Jan-96 Oct-96 Jul-94 Jul-95 Jul-96 Excluding tax Canada Pump Price US Pump Price (Cdn ¢/l) Including tax Canada Pump Price source: Natural Resources Canada MJ ERVIN & ASSOCIATES 34 . although Canadian pump prices in urban markets are clearly higher than in the US. for several years. if not all of the difference in pump prices between Canada and the US.Figure 13: Monthly Gross Marketing Margins. resulting in significantly higher Canadian gasoline prices. with and without tax. is presented in Figure 14. US Price History The retail gasoline tax structure in Canada is vastly different than the US. On an ex-tax basis. Canadian pump prices have been roughly equal to. A comparison of Canadian and US regular gasoline pump prices. This shows that.Selected Centres 16¢ HALIFAX Canada Average 12¢ Price per litre 8¢ 4¢ 0¢ CALGARY TORONTO HALIFAX Jul-91 Jul-92 Jul-93 Jul-94 Jul-95 Jan-91 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Apr-91 Oct-91 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96 (4¢) source: Natural Resources Canada (pump price inputs) & Bloomberg OBG (rack price inputs) Canada vs. or even less than. this is wholly attributable to the difference in taxation. US pump prices. This difference accounts for most.

Figure 15 compares these values for selected Canadian and US centres over a period of several years. Rack Price History The behavior of rack or wholesale prices provides an indication of the degree of competition among refiners. and moving up or down more or less in unison. there are likely some differences in the competitive dynamics in US markets compared to Canadian markets. as a result of outlet closures (see Figure 5. This is no longer the case however. This would be a useful area for further research. both a cause and an effect of improved throughputs and ancillary revenues as previously described. From this it can be seen that Canadian and US rack prices. Canadian consumers do not experience any retail gasoline pump price disadvantage to their US counterparts.Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US. largely as a result of two factors: • Canadian marketing margins have decreased in this period. Prior to 1994. The introduction of Reformulated Gasolines (RFG) into some US markets has caused prices to rise. have improved considerably. page 24) and somewhat increased demand. RFG has not been introduced to Canadian markets. trading at any given time within a relatively narrow (about 2 cents per litre) range. While these trends have also occurred in the US. when compared on an ex-tax basis. Canadian ex-tax pump prices were historically somewhat higher than in the US. Figure 15: Monthly Rack Prices: Selected Markets 31¢ 29¢ TORONTO SEATTLE (Cdn ¢/l) 27¢ VANCOUVER WINNIPEG Price per litre 25¢ 23¢ 21¢ BUFFALO (Cdn ¢/l) 19¢ 17¢ 15¢ Jul 93 Jul 94 Jul 95 Apr 93 Apr 94 Apr 95 Jan 93 Jan 94 Jan 95 Jan 96 Oct 93 Oct 94 Oct 95 Apr 96 Jul 96 source: Bloomberg Oil Buyers’ Guide / Natural Resources Canada MJ ERVIN & ASSOCIATES Oct 96 35 . • Although this study shows that on an ex-tax basis. which is reflected in US average pump prices. behave in a very similar fashion. Canadian outlet throughputs (although likely still less than those of the US).

conditions begin to favour a “seller’s market”. As non-refiner marketers attempt to secure a supply of this diminishing inventory.000 2. a “buyers market” develops.That Canadian rack prices are so closely tied to those of the US is strong evidence of the interdependence of these two macro-markets.500. Gasoline price exhibits a similar. rising and falling closely in step with demand. Demand vs. This phenomenon actually illustrates the essence of how competition in the petroleum industry operates to self-regulate the price of gasoline: The rising demand for gasoline which occurs every spring has a diminishing effect on product inventories.700. and falling in the latter half of each year. the price tends to be bid upwards.000 2. Yet in the latter half of each year. of motor gasolines from 1991 to 1996.000 1. any given Canadian or US rack point cannot successfully price its wholesale product substantially higher than that of any other rack market in continental North America.900. Such a pattern is sometimes perceived as evidence of refiner or supplier “price gouging”.700. albeit less distinct pattern. or sales. Simply put.000 Jan-91 14¢ Jan-92 Jan-93 Jan-94 Jan-95 Ex-tax Pump Price (Canada avg. or indeed anywhere.000 2. and as would be expected in any commodities market under these conditions. as demand ebbs and inventory improves. Gasoline demand exhibits a very regular seasonal pattern. Figure 16: Monthly Demand vs.900. To do so would invite the inevitable consequence of rack customers themselves sourcing their product needs from the rack point that offers the lowest price (plus freight expense).500. Price History Figure 16 shows the history of Canadian gasoline demand.000 34¢ 2. compared to average ex-tax regular gasoline pump price for the same period.100. not only in a given market. increasing significantly every spring. Pump Price (nominal ¢/litre) 3.000 2.100. and prices tend to fall. but in fact across the North American continent (US demand follows a similar pattern).000 24¢ 1. per litre) 12 Month Moving Average 19¢ 29¢ 44¢ Monthly Demand ('000's litres) 39¢ source: Statistics Canada (demand) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 36 .000 1.300.

while average ex-tax pump price declined by 14% (since 1994. while world crude prices and Canadian taxes have generally increased over the past several years.3%. a feature of most marketregulated commerce. in that prices have fallen. pump prices have increased due to a significant rise in crude costs in this period). Figure 16 shows that from 1991 to 1995. the essence of a free market economy. This part of the study presented a number of historical views of retail gasoline prices. as evidenced by declining industry margins. On a long-term basis however. and it can be seen to operate as effectively in the Canadian petroleum products industry as it does in any open market. and product taxes which add to the consumer price of gasoline. This is of course. gasoline prices have not followed the traditional model.Whether in the spring or the fall. All of the findings suggest that. and this is clearly demonstrated in the case of gasoline prices on a seasonal basis. The next part of this study will undertake a comparative perspective: examining pump price and margin differences that exist between individual markets within Canada. competing to meet their own needs. price fluctuations at the rack (and consequently at the pump) are a simple reflection of buyers and sellers alike. MJ ERVIN & ASSOCIATES 37 . Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels. which consists of the refiners and marketers of gasoline and other petroleum products. their related product costs and margins. The traditional supply-demand model predicts that when demand rises. has operated in a highly competitive environment. so do prices. despite a rise in demand. the downstream petroleum industry. demand rose approximately 8. which ensures a competitive product price for buyer and seller alike.

so that a broad range of the following criteria was represented: • • • • • population proximity to refinery proximity to primary supply point proximity to US border proximity to other retail markets Twenty markets were initially selected by the committee. namely product margin. Nineteen markets were therefore adopted for the study (Table 3). and pump prices alone provide very little opportunity for “comparability”. These “outside factors” tend to obscure the more relevant aspect of pump price. ancillary revenues. freight. which relates solely to that sector of the petroleum industry directly involved in using pump price as a competitive tool. etc. but contains two inherent limitations: • • data is drawn exclusively from major Canadian centres. and a more detailed examination of price.. Part D of the study therefore has two main objectives: • an examination of a diverse array of markets in order to determine the degree of similarity or dissimilarity between them. outlet volumes. MJ ERVIN & ASSOCIATES 38 . is useful in providing broad overviews of industry price and margin trends. • Methodology Selection of Markets A number of markets were selected for the study. margins and related implications for market competitiveness than can simply be provided by existing public-domain data.Part D Selected Markets Study Introduction A review of public domain data on current and historical prices as presented in part C. although one was subsequently dropped due to insufficient submitted data. there is no regular monitoring of pump prices in smaller centres. outlet costs. and in order to provide insights into the range of competitive dynamics that may exist. play a role in a market’s pump price. A number of factors such as taxes.

and for smaller markets. In addition. the gross marketing 1 Although White Rock is clearly not a major centre by itself. but a number of variables. To examine the competitiveness of the marketing.and consequently competitiveness . Suncor Inc.. In all.0001. and Group B markets less than 500. Furthermore. the gross marketing margin must be examined in isolation from those other variables. Petro-Canada. confidential data were collected and independently evaluated on 481 retail gasoline outlets in 19 Canadian markets. Table 3: Selected Study Markets Total (19) Group A (8) BC/PR (9) Vancouver* Victoria White Rock Calgary* Winnipeg ON(4) Toronto Ottawa* QU/AT (6) Montreal* Group B (11) Nanton AB Peace River AB Regina* Thompson MB Sault Ste Marie* Sioux Lookout Chicoutimi* Gaspé Saint John NB* Charlottetown Halifax * forms part of ancillary revenue and cost analysis Sources of Data In order to conduct a detailed study market analysis of retail marketing operations. price history data not available through public sources. This study compiled both sets of financial data in order to produce a net revenue/cost per outlet picture which eliminated the effect of mode differences. or “rack to retail” sector. Shell Canada. retail outlet and brand representation. MJ ERVIN & ASSOCIATES 39 .000. these organizations provided market-level data on freight costs.are influenced not by one. it was essential to obtain data not normally available through existing public sources. Five companies responded to this request: Imperial Oil. 2 Depending upon the outlet mode. both the dealer and the product/brand supplier realize revenue and incur costs associated with an outlet. its situation in the Greater Vancouver Regional District placed it in the category of a Group A market. Process Overview As illustrated in part A. retail pump prices . and Canadian Tire Petroleum. and Quebec/Atlantic) and market size: Group A markets included population centres in excess of 500. member companies of the Canadian Petroleum Products Institute (CPPI) were approached to provide detailed outlet operating petroleum and ancillary revenue and cost data2 for a random sampling of outlets in each of the selected study markets.Each market was classified according to regional affiliation (BC/Prairie. Ontario. To this end.

1995 average values were determined for pump price. 1 Although outlet cost and ancillary revenue data was not available for all markets. For each market. to arrive at “blended” values2. 2 Accordingly. Where differences in gross product margin might still exist. this study postulates that average outlet throughput in each market may be a significant factor affecting margins and prices. 3. average outlet annual throughput was determined for each market. Where applicable. and freight were successively removed from the pump price. MJ ERVIN & ASSOCIATES 40 . including some smaller centres. 2. tax content. The variables of tax content. and the final “rationalized” gross product margin was determined for each market. From participant company supplied data. This allows for an accurate determination of net outlet revenue. in addition to operating cost and ancillary revenue data gathered in the study1. to derive the 1995 average gross product margin for each of the study markets. a market-by-market profile of outlet income is presented. rack price. weighted by sales demand. Values were weighted by market population using 1991 Statistics Canada census data in order to determine Group A (major urban). these were weighted by volume. and freight. Process Description Figure 17 shows an overview of the process used to reduce the study market 1995 pump prices into its sub-elements: Figure 17: Study Market Methodology PUMP PRICE 1 EX-TAX PUMP PRICE RACK PRICE CRUDE PRICE FREIGHT TAX OUTLET VOLUME 3 PRODUCT MARGIN 5 REFINER MARGIN UPSTREAM 2 6 7 DEALER PROFIT MARKETING COSTS MARKETING PROFIT ANCILLARY REVENUE PETROLEUM REVENUE PER OUTLET OUTLET COSTS 4 PETROLEUM REVENUE PER OUTLET CONSOLIDATED NET INCOME PER OUTLET OUTLET COSTS 1. average pump prices are higher than actual average regular gasoline prices. a broad representation of markets was possible. Using the derived gross product margins and volumes for each market. by product grade. the study postulates that outlet operating costs and revenues from ancillary sources (such as convenience store sales) might affect how the dealer establishes competitive pump prices. The gross product margin thus serves as an interim basis for comparing study markets. Group B (smaller market) and 19-market study averages. Gross product margins are therefore compared to corresponding volumes to determine if a cause-and-effect relationship exists.margin is stripped of its freight component. as the “blended” price includes other product grades. rack price. Finally.

it is important to understand that the use of rack price in this analysis has certain implications. and therefore where assumptions were made. When these margins are applied to outlet throughputs as in step 4 above. including relatively smaller ones such as Sioux Lookout or Gaspé. Supplier Overhead costs. Since actual wholesale prices (using transfer or contract prices) are not available in the public domain.. These differentials do vary from one market to another. the effect on the “blended price” is small. many wholesale petroleum purchases are made at less than the “posted” rack price. Use of Rack Price The derived value of retail gross product margin is essentially based upon two price points: pump price and rack price. represent a broad range of markets. the rack price basis results in petroleum revenues which are understated to a somewhat greater degree in high throughput markets than they are in low throughput markets.to determine average consolidated net revenue per outlet. Wholesale refined product prices used in this study are therefore likely to be overstated. and from one brand to another. Interpretation of Data In some smaller centres. accurate comparisons are possible. and outlet operating costs were deducted from total revenue.. as described on page 10. and gross product margins are therefore likely to be understated. encompassing a significant portion of the entire Canadian market. freight. grade differentials were based on known differentials of nearby markets. This value was then applied to the gross product margin to determine average outlet petroleum revenue. The derived weighted average values of pump price. marketing margin. objective data exist for both of these values. and accordingly represent a broad spectrum of consumers and marketers. the Bloomberg rack price is used as the defining wholesale price point which differentiates between the refiner and marketing sectors. The resultant consolidated net revenue per outlet was examined in terms of its component elements of Dealer Income. product margins.4. perhaps by 1 to 2 cents per litre. In referring to marketing margins. MJ ERVIN & ASSOCIATES 41 . While clear. Bloomberg rack price values were used as the assumed wholesale price. so that on a cents-per-litre basis. petroleum revenues. . and supplier profit. From participant company data. average revenues from ancillary services were added. 5. a recognized source of data on world crude oil and petroleum markets and prices. or consolidated net incomes. also considering that RUL constitutes the majority of product.. Rack prices used in this study are taken from Bloomberg Oil Buyers’ Guide™. 7. Unlike retail pump prices however. these 19 markets represent a combined population base of 8. Also. etc..7 million. A dollar-per-outlet estimate of these elements was made. This variation is constant across all nineteen markets however. 6.. but they are relatively minor.

The 19-market study group exhibited a statistical variance1 of 17. Tax Figure 19 shows posted pump prices for the study markets. Several variables beyond the control of the retail gasoline sector are incorporated into the pump price however. Figure 18: 1995 Average "Blended" Pump Price 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Price per Litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River On the basis of posted pump prices. accurate. The data also shows that typically. while lower prices tended to prevail in major centres. but a variance of only 12. MJ ERVIN & ASSOCIATES 42 . and these tend to interfere with an objective comparison of fundamental competitive differences which may exist. The first of these variables to be examined is tax. The data shows a statistical pump price variance of over 17 cents per litre within this study group.Rack prices used in this study are nevertheless market-driven. there is little to suggest why such a high variance exists. broken into tax and extax components. independently gathered data. higher priced markets are associated with smaller population centres. The study data suggests that variations in tax rates account for a significant part of pump price differences.8 cent difference in pump price 1 See footnote at Appendix II.38 cents per litre in ex-tax pump price. and based on objective.64 cents per litre in pump price. A 6. table J for an explanation of how variance is derived. Study Market Findings Posted Pump Price Figure 18 shows 1995 average retail pump price (using a “blend” of gasoline and diesel grades) for each of the 19 study markets.

1 Due to pump price differences. thus providing a better basis for comparison. taxes were a significant element of pump price.while all markets are subject to the same rate of federal excise tax and GST1. while taxation between provinces is more pronounced . when examined on an ex-tax basis.less than one-half cent per litre. As this study seeks to isolate the marketing or “rack to retail” sector as a competitive entity. but the variance is minimal . it is therefore more useful to use ex-tax pump prices when comparing any two markets. Montreal). Since the level of taxation is clearly a factor which is beyond the control of the petroleum industry.between Calgary and Vancouver for example. the resultant ex-tax pump price nevertheless represents a gross margin for the entire oil industry. In all study markets. as described in part A. This eliminates any effect that tax variability may have. Average 1995 taxation within the study group ranged from 22 cents per litre (Nanton) to 28. Figure 19: Pump Price . Upstream and Gross Refiner Margins Although the deduction of tax content is useful. was less than three cents. or when examining historical price trends. namely the upstream industry and refiner sector. ex-tax elements 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ Cents per litre 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Tax 95 Blended Extax Price Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences. GST content can vary by market. MJ ERVIN & ASSOCIATES 43 . additional elements of the revenue stream must be further isolated.tax. The data shows that taxation between markets within the same province varies little. accounting for roughly half of the average retail price.75 cents per litre (Vancouver. provincial tax rates can vary greatly.

rack price) and gross marketing margin elements.assuming transport costs did not outweigh the price difference. the rack price is equivalent to the upstream margin plus the refiner’s margin. the resultant gross marketing margin represents that portion of the pump price model which relates solely to the retail marketing sector. To address this. When rack price is deducted from the ex-tax pump price. as is examined below. reflecting some differences in refinery crude acquisition costs. the validity of analyzing gross marketing margins in isolation might be raised. It can also be seen that upstream/refiner margins for remotely located markets such as Thompson MB. are clearly delineated by market-driven crude. and their respective margins. one region cannot maintain rack prices at a higher level than another. Figure 20: Ex-Tax Pump Price Elements 40¢ 95 Retail Marketing Margin 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River 95 Blended Rack Price As many petroleum marketers are also involved in crude oil production and product refining. The figure shows that combined gross Refiner/upstream margins are relatively uniform among the study group. reflecting the reality that at the rack level of competition. the dynamics of (marketing) retail pump prices are quite distinct from those of (refiner) rack prices. rack and pump prices. it should be restated that each of these sectors. Freight costs are additional. but ultimately. as this would cause rack buyers to bring product in from the lower-priced region . the rack price is set at the rack point (Winnipeg. in the case of Thompson). Figure 20 shows ex-tax pump price isolated into its upstream/refiner (ie. This is due to the fact that for any market. differ little from those of major centres. Furthermore.Since the refiner’s rack price incorporates the raw material cost (crude price) plus the “value-added” element of refining. if a clear understanding is to be achieved. and therefore are best analyzed separately. MJ ERVIN & ASSOCIATES Cents per litre 44 .

It is axiomatic that remote markets incur higher freight costs than those located close to the source of supply. MJ ERVIN & ASSOCIATES 45 .49 cents per litre (gross product margin). one final outside variable must be isolated: that of product freight.0 cents per litre. this freight cost is almost negligible.3 cents per litre. For other. Two of the study markets had freight costs in excess of 3. For markets which are also established as rack points. and therefore a significant pump price factor. Finding 17: Market-specific differences in product freight are a key factor in inter-market ex-tax pump price differences. with their component freight costs. resulting in comparative gross product margins. it is essentially a “non-core” business. as low as 0. Figure 21: Gross Marketing Margin Elements 20¢ 15¢ Freight Cost 95 Retail Product Margin 10¢ 5¢ 0¢ Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Elimination of the freight variable reduced the study group’s statistical variance from 13. most Canadian marketers contract out at least some of its product distribution needs to third party cartage companies. the data shows that freight is often a significant part of the gross marketing margin. Before using this as an analytical tool however. remote population centres. To provide a comparative view of the marketing dynamics within the study group. generally smaller markets. Although freight operations are often an integral part of many petroleum marketing operations. in fact.Gross Marketing Margin and Freight Cost The gross marketing margin provides for a useful comparison of revenue streams available to the retail gasoline marketing sector. Figure 21 shows a study market comparison of gross marketing margins.16 cents per litre (gross marketing margin) to 7. particularly in comparisons of major urban markets to small. it is therefore important to eliminate the freight variable from the gross marketing margin.

the gross revenue available to the petroleum marketing sector for its operations.6 cents) to the variance in their component gross product margins (7. Group A (larger population) markets averaged 5. which suggests that there may be an additional factor which is responsible for pump price 1 This is considerably more than the 3.95 cents per litre. was the highest of the study group. whereas the study market result cited here incorporates all gasoline grades and a broad variety of population centres.6. to the resultant retail gross product margin . The study revealed that: • • Retail gross product margins differ very little between major urban markets . as the 3.17 cents per litre. at 3.22 cents per litre Smaller markets showed a wider variance in gross product margin . MJ ERVIN & ASSOCIATES 46 . or consolidated net incomes. For all study markets. product margins. or between any two regions. In referring to marketing margins.a variance of only 2. Bloomberg rack price values were used as the assumed wholesale price. Gaspé. it is evident that the non-industry factors of taxation and freight cost are partly responsible for pump price differences between any two markets.5 cent variance in gross product margin is still significant however. Figure 22: Petroleum Gross Product Margins 70¢ 60¢ 95 Retail Product Margin 95 Blended Pump Price 50¢ 40¢ 30¢ 20¢ 10¢ 0¢ Victoria Vancouver White Rock Winnipeg Calgary Nanton Regina Toronto Ottawa Sioux Lookout Chicoutimi Saint John Thompson Peace River Montreal Halifax Gaspé Sault Ste Marie Charlottetown When comparing the variance in pump prices within the 19-market study group (17. petroleum revenues.5 cents per litre average Gross Product Margin cited in Part B. was the lowest. 1995 gross product margin averaged 5.5 cents).68 cents per litre. at 14.Retail Gross Product Margin Figure 22 provides a comparison of the original pump price for each study market.42 cents per litre.68 cents per litre1. while Group B markets averaged 7. while Toronto.06 cents per litre. A 7.5 cent per litre average relates to regular gasoline in major markets.

000 0 Chicoutimi Thompson Saint John Victoria Winnipeg Nanton Toronto Ottawa Regina Sioux Lookout White Rock Vancouver Calgary Montreal Halifax Gaspé Sault Ste Marie Charlottetown Peace River Relationship of Gross Product Margin to Outlet Throughput Figure 22 shows that.000 litres per year (Sioux Lookout) to over 5.000.000. a distinct relationship between product margin and outlet throughput emerges: MJ ERVIN & ASSOCIATES 47 . If these two factors are related to each other as they are in Figure 24. vs. an examination of related outlet throughput volumes is necessary. This study’s data shows that the range of volume performance among outlets within a given market is relatively narrow. for example. it would likely be so unprofitable as to be un-viable. Figure 23: Average Annual Throughput per Outlet 6.000 5.000 1. Indeed.2 cents per litre in Gaspé. a wide range of variability still exists between markets in the study group . sold significantly less than 5 million litres of petroleum per year. 3. if any retail gasoline outlet located in the Toronto area for example. To understand why such a wide range of margins can exist after eliminating all tax and freight variables.000.000 litres per year (Toronto).000.000.1 cents per litre in Toronto.000 4.000. ranging from under 700.000 2. Outlet Throughput Figure 23 shows average annual outlet throughput (sales volume) for the study group. A wide range of volume performance is evident.differences between markets.000. Figure 23 shows a similarly wide range of variability in average throughput per retail outlet within these same markets. once isolating retail gross product margin from all of the “outside” pump price factors.000 Litres 3.14.

while those with high Gross Product Margins tend to have low outlet throughputs.000 3. Regionally. Smaller markets perform as competitively as larger centres. This analysis of outlet throughput and gross product margin by market leads to one of the more significant findings of the study: Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes.962 R2 = 0. compared to 2.4 million litres annually. and the higher prices (and margins) generally seen in these markets were a function of poor volume performance. With few exceptions.Figure 24: Outlet Volume vs.000. If all outlets in a given market experience generally low throughputs.a low volume outlet would be much less profitable than one in the same market with significantly higher volumes. Ontario.000.000.000 5. an outlet with low throughput would derive less petroleum revenue than a high-volume outlet.000 6.that is.000.6624 1. they remain essentially the same regardless of volume changes .7 million respectively. Although MJ ERVIN & ASSOCIATES 48 .6634Ln(x) + 76. As most outlet operating cost are fixed in nature .95 cents). the 19 study markets exhibit a high degree of uniformity of gross product margin as a function of outlet throughput.42 cents) than smaller (Group B) population centres (7. it follows that higher gross product margins will be the consequence.000. On average however. It can be seen from Figure 25 that major centres (Group A) generally experience smaller retail gross product margins (5. not of poor competition.000 Halifax Montreal 0¢ That such a relationship would exist is understandable: with the same margin. Gross Product Margin 18¢ Peace River Thompson Chicoutimi Saint John Charlottetown Victoria Vancouver White Rock Calgary Regina Winnipeg Ottawa Sault Ste Marie 16¢ 14¢ 12¢ Gaspé Sioux Lookout 10¢ 8¢ 6¢ Nanton 4¢ Toronto 2¢ y = -4.000. the Group A market outlets had roughly 50% more throughput than Group B outlets .000 2.000 Volume (litres) 4. all market groups (BC/Prairie. and Quebec/Atlantic) exhibit a close adherence to expected margins based on throughput.

It represents the residual revenue which is available to the dealer and to the supplier. Consolidated net revenue is the result of combining gross petroleum revenue (gross product margin times throughput) plus ancillary revenue (excluding cost of merchandise). two additional factors are introduced: ancillary revenue and outlet operating costs.000 6. this is likely due to the higher incidence of Group B study markets within this region. and supplier MJ ERVIN & ASSOCIATES 49 . Figure 26 summarizes total outlet petroleum sales. outlet-based view of retail markets. Ancillary revenues are those derived from non-petroleum sales sources. competitiveness occurs between retail outlets. less outlet costs. car wash.000. is only a measure of petroleum revenue per litre.716 .000 2. These additional factors clearly have an effect on the relative competitiveness of retail markets. and ultimately shows that very little difference in competitiveness exists between any two markets.000 Volume (litres) The examination of gross product margin as a function of outlet throughput provides a comprehensive and objective rationalization of inter-market pump price differences.000.000. however.000. In reality.the revenue available for dealer income.000 3. and incur many expenses in the course of their commerce.000 5. and must be examined. ancillary sales.Regional & Urban Groupings 18¢ 16¢ 14¢ 12¢ 10¢ 8¢ Group B markets QU/AT markets BC/PR markets Group A markets Ontario markets All study markets 6¢ 4¢ 2¢ 0¢ 1. which for the study group. product cost. in addition to petroleum sales.000 4. and the resultant consolidated net revenue. Consolidated Net Revenue per Outlet To create a complete. and auto service.000. such as convenience stores. as described below. while operating costs are those costs which are directly incurred in the operation of the retail facility. which. averaged $69.Quebec/Atlantic markets appear to experience higher margins (and smaller throughputs) than other regions. supplement their incomes with other revenues. Figure 25: Outlet / Volume Relationship . supplier overhead costs.000. Gross product margin.

Although outlets in smaller (Group B) markets had higher outlet consolidated net revenues than major market outlets . and his personal labour investment.$154. $60.000 $50.000) $(150.000 $100. MJ ERVIN & ASSOCIATES 50 .000 per year respectively . petroleum revenues alone are insufficient to offset the operating expenses associated with retail petroleum outlets. In effect. which reflects his investment in the outlet. Table K).000 $($80) ON QU/AT Group A Group B All Study Mkts $(50. consolidated net revenue is the residual revenue which is available to the dealer and to the supplier.000) $(300. causing the weighted average for Quebec / Atlantic to be depressed). although these differences are somewhat overstated (market data for Montreal showed particularly low net revenue. Costs.000) 1: Net Retail Petroleum Revenue 2: Ancillary Revenue 3: Outlet Costs 4: 95 Consolidated Retail Outlet Income The findings depict that some inter-regional differences in outlet net revenue exist. as explained below. An examination of these component elements reveals a significant finding: that for most markets.000 $200.000) $(350. these ancillary operations contributed to a lower product margin and consequently. A discussion of the ultimate distribution of this revenue is useful. The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations.000) $(250.000) $(200. Most markets showed relatively similar net revenues (see Appendix II. Income BC/PR $300.000) $(100. Finding 19: Based on published rack prices. Figure 26: Outlet Revenues.000 vs.profits. As described above. Dealer and Supplier Profitability Consolidated net revenue represents the source of cash flow for three distinct purposes: • dealer income/profit: the return or salary to the dealer. petroleum sales revenues alone were insufficient to cover operating costs for the 481 individual outlets studied.000 $150.Group B outlets were not as profitable as these revenue values might suggest.000 $250. reduced pump prices.

supplier overhead: all operating costs of the supplier that are not directly associated with a single outlet. These costs would include salaries of marketing representatives and management, brand advertising, corporate charity, sales processing, head office and regional office overheads, etc.. supplier profit: after the above costs are allocated, the residual revenue is available as profit to be re-invested into retail operations, and/or distributed to shareholders.

Although ideally, this study would quantify each of these values, there are no clear, objective means to do so. In particular, the measurement and subsequent allocation of supplier overhead costs on an outlet-by-outlet basis is an inexact science, at best. This study therefore provides an estimate of these values, as shown in Table 4.

Table 4: Estimated Cash Flow from Consolidated Net Revenue
All Study Market Avg. Consolidated Revenue (data supported) comprised of (estimated): Dealer Income Supplier non-outlet Overhead Supplier Residual Profit $32,000 $52,000 $(14,000) 0 to $60,000 $30,000 to $70,000 $(30,000) to $150,000 $70,000 Estimated Range ($15,000) to $220,000

note Supplier overhead estimates are based on MJ Ervin & Associates research data not directly related to this study.

Despite the fact that these table values are estimates, the values, and the supplier residual profits in particular, are believed to be a reasonable assessment of the state of retail profitability in Canadian retail petroleum markets. Accordingly, in 1995, a typical retail outlet is estimated to have returned a net loss to the supplier in the order of $14,000, using Bloomberg rack prices as the cost basis. Finding 20: For the 481 individual outlets studied, after the average 1995 outlet revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements, the residual represented a net loss to the supplier. Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads, residuals for outlets not studied may be better. This may contradict other indications that 1995 in fact may have represented a profitable year for Canada’s major oil companies. This was unlikely to be as a result of retail marketing operations, however, and was more likely a result of other operations including upstream, refining, or petrochemicals. Also, non-refiner marketers, who did not contribute to the study database, may have realized somewhat better profitabilities than indicated here: it is likely that their dealer costs and supplier overheads are less than those of major oil companies. Nevertheless, this data illustrates an important finding:

MJ ERVIN & ASSOCIATES

51

Finding 21: Based on published rack prices and the individual outlet data, the profitability of the 481 outlets studied appears only marginal. The viability of the Canadian retail gasoline sector as a whole may be somewhat better, given the possibility of discounts from posted rack prices and potentially lower overhead costs. Unlike the major market outlets, rural market outlets used in this study appeared to be somewhat more profitable. This may not be representative of rural outlets in general, however, since the 11 Group B markets were chosen for this study for some particular criteria, not necessarily to be “typical” small-population markets.

Market by Market Competitive Analysis
This section of the study provides a detailed market-by-market analysis of the 19 study markets for the purpose of illustrating some competitive dynamics that may exist in retail gasoline markets.

Explanation of Format
Each market commentary begins with a demographic overview as shown below, providing values and rankings for a number of parameters: • • • • • population - taken from 1991 census data, this is the population of the greater metropolitan area (census district) of each municipality. # of brands - number of brands, as reported by study participants. # of outlets - estimated number of outlets, as reported by study participants. outlets per 10,000 - number of retail outlets per 10,000 population. avg outlet volume/yr - average outlet annual throughput, based on participantprovided outlet data. Total market volume and total outlets were not used to derive this measure, as they are estimates only. 95 mktg mrgn - gross marketing margin, as defined in part A of this study. freight - freight cost per litre associated with transporting petroleum from the rack point to a typical outlet in the market. 95 prod mrgn - gross product margin, as defined in part A of this study. rank or rank* - ranking of the value within the range of study group values. Where an asterisk appears (*), rankings are lowest value = 1, otherwise highest value = 1. sample size - the number of retail outlets for which data was collected in this market.

• • • •

Where sufficient data exists, a historical record of relevant prices is shown in graphical form.

MJ ERVIN & ASSOCIATES

52

Victoria
population # of brands # of outlets outlets per 10,000 299,550 12 106 3.54 rank 8 rank 9 rank 8 rank* 6 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,223,068 litres 6.89 ¢ 0.41 ¢ 6.48 ¢ rank 9 rank* 7 rank* 10 rank* 7

sample size 26

General: Victoria is a relatively major market, and its location on Vancouver Island presents some uniqueness with respect to supply. Geographic / Supply / Freight cost considerations: As Vancouver Island has no refinery, Victoria depends upon marine supply from the Vancouver mainland, or potentially from any marine source of supply in the Pacific Rim. This broad access to supply has occasionally allowed some marketers to purchase “spot” gasoline at relatively low rack prices, creating a short-term drop in pump prices. In the past several years, the rack market across Canada has grown more robust, such that all Canadian rack prices now follow those in the US very closely, and most Canadian markets now benefit from the same type of cross-border rack competition that Victoria had experienced. Influence of other markets: Due to its geography, consumers in this market are somewhat “captive” to the local retail gasoline marketers: no opportunity exists to drive to other markets to purchase retail gasoline on a casual basis. This had no apparent effect on the level of competition or price levels however, as described below. Price history / Taxation: Pump prices have historically been quite volatile, often at times when other markets have been quite stable, as described above. Victoria collects a 1.5 cents per litre municipal tax. Ex-tax pump prices are on average, very close to the Canadian 10city average. Margin/Throughput relationship (Figure 24): Victoria fell within a cluster of markets with similar margin/throughput relationships. Product margin was marginally less than expected for a market with these throughput characteristics. Consolidated net revenue: No ancillary or outlet cost data was available.

Figure 27: Victoria - Price History
60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢
Crude Oil Price Vancouver Rack Price Victoria Posted Price - ex tax Canada Average - extax Victoria Posted Pump Price RUL Canadian Average Posted Pump Price

10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Jan-92 Jan-93 Jan-94 Jan-95 Oct-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95

MJ ERVIN & ASSOCIATES

53

extax Canadian Average Posted Pump Price Vancouver Posted Pump Price RUL MJ ERVIN & ASSOCIATES 54 .658.745 18 446 2. Overall. This may explain the somewhat elevated gross product margin in this market. ranking 11th. contributing to a higher than average pump price.968 litres 7.000 barrel per day plant located in the greater Vancouver area.38 ¢ 7. Vancouver is also a terminal for a refined products pipeline from Edmonton. The somewhat high margin placed this market slightly above. and with access to wholesale product by several means. Geographic / Supply / Freight cost considerations: As a port city.Vancouver population # of brands # of outlets outlets per 10.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Vancouver Rack Price Vancouver Posted Price . Price history / Taxation: Pump and ex-tax prices have historically been somewhat higher than the Canadian 10-city average. and also has local refining capacity. but well within a cluster of markets with similar throughputs.542. Influence of other markets: Although relatively close to the US border.ex tax Canada Average .60 ¢ rank 4 rank* 9 rank* 9 rank* 11 sample size 37 General: As one of Canada’s major retail markets. driving distances preclude most Vancouver consumers from routinely accessing this neighboring market. Low consolidated net revenues may have contributed to the higher margin. Vancouver collects a 4 cent per litre municipal tax.89 rank 3 rank 5 rank 3 rank* 2 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. a 60. as described below.000 1. net outlet revenues were less than those of other major centres. Vancouver provides several perspectives into retail marketing. this market has access to numerous refiners along the Pacific coast through marine supply. Margin/Throughput relationship (Figure 24): Gross product margin was slightly high.98 ¢ 0. while average throughput ranked 4th. Consolidated net revenue: Vancouver outlets averaged the highest in both ancillary revenue and outlet operating costs. Figure 28: Vancouver .

Despite its relatively small size. or competitive dynamics. but less than most markets with a small population base. White Rock is essentially part of a major market due to its proximity to Vancouver. Price history / Taxation: Although no specific data is available. price/competitive dynamics appeared to relate more to the influence of Vancouver than to any cross-border factors. MJ ERVIN & ASSOCIATES 55 . prices.98 ¢ 0. thus providing some unique characteristics for the market study. gasoline “cross-border shopping” is less pronounced than might be expected. This is likely due to the fact that unlike many smaller markets. and retail gross product margin was less than that of markets with a similar population base. The reality may be that the immediate necessity of filling one’s gas tank may often preclude a cross-border trip. this market is subject to a 4 cent per litre municipal tax. This market is close to its usual rack point. due to its proximity to one. the study data found little to suggest a material effect upon representation. prices in this market have historically mirrored those of Vancouver.White Rock population # of brands # of outlets outlets per 10. Average outlet throughputs were relatively high.53 ¢ rank 5 rank* 9 rank* 12 rank* 10 sample size 5 General: White Rock is situated on the lower mainland of BC.604. This suggests that. at least in this market. Geographic / Supply / Freight cost considerations:. adjacent to the United States border.90 rank 14 rank 17 rank 14 rank* 13 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.45 ¢ 7. Vancouver. Consolidated net revenue: No Ancillary or outlet cost data was available for this market. In all respects. Margin/Throughput relationship (Figure 24): gross product margin was virtually identical to that of Vancouver.000 16. Freight costs were accordingly low compared to other small markets in this study.315 4 8 4. the White Rock retail gasoline market displayed the same attributes as a major urban market. Like Vancouver.630 litres 7. Influence of other markets: Although this market is a border-crossing community. White Rock’s margin was typical of markets with similar outlet throughputs.

This trend is largely due to a low provincial tax rate: when compared on an ex-tax basis.4 rank 4 rank 3 rank 4 rank* 9 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Calgary is of sufficient size to support a viable rack market. Calgary had the third highest number of retail brands. Rack-to-outlet freight costs are among the lowest in the study group. Other considerations: Of the markets studied.47 ¢ 0. creating some competitive pressures (see Nanton). Geographic / Supply / Freight cost considerations: Although there is no refining capability within this market. Consolidated net revenue: was typical of other major markets in the study group. indicative of a strong competitive climate. Product is usually sourced from Edmonton refineries via pipeline.Calgary population # of brands # of outlets outlets per 10. Figure 29: Calgary .719 litres 6. pump prices in this market have historically been well below the Canadian 10-city average. Margin/Throughput relationship (Figure 24): Gross product margin was very typical of other study markets with similar throughput characteristics. which was one reason for selecting Calgary as a study market. on some occasions the Calgary ex-tax RUL pump price has dropped to within one cent per litre of rack price. Indeed.675 27 313 4.extax Calgary Posted Pump Price RUL Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 56 . Calgary pump prices are very close to the Canadian average.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Calgary Rack Price Calgary Posted Price .000 710. Price history / Taxation: As the figure below shows.827. Some smaller markets in the vicinity have occasionally priced below Calgary.24 ¢ 6.23 ¢ rank 3 rank* 6 rank* 3 rank* 6 sample size 69 General: Alberta enjoys the lowest provincial product tax rates in Canada.ex tax Canada Average . Influence of other markets: Calgary is fairly remote from US and other major markets.

50 ¢ 0. this market has generally exhibited pump prices which are somewhat higher than the Canada 10-city average. Regina was of some interest as a study market. supply/demand is likely more balanced.794 litres 7. this market is removed from other significant markets.089.21 ¢ 7. Figure 30: Regina .Price History 65¢ Regina Posted Pump Price RUL 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ Crude Oil Price Regina Rack Price Regina Posted Price . Since 1993. Consolidated net revenue: was typical of other similar markets. Ex-tax prices are also above average. and therefore experiences no particular influences from any other major market. margins and throughputs were typical of other markets with a similar population base. Although no supporting data is available. reflecting a somewhat higher than average gross product margin relative to the 10-city weighted average. which are among the highest in Canada. price volatility has eased. Freight costs were therefore low: Regina ranked first (least) in freight costs among the entire study group.ex tax Canada Average . Influence of other markets: Like Calgary. and a history of volatile pump prices.extax Canadian Average Posted Pump Price 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 MJ ERVIN & ASSOCIATES 57 . Geographic / Supply / Freight cost considerations: Regina possesses its own refining capacity.Regina population # of brands # of outlets outlets per 10.29 ¢ rank 10 rank* 8 rank* 1 rank* 8 sample size 30 General: With local refining capacity. Margin/Throughput relationship (Figure 24): Although gross product margin was high relative to major markets. and is therefore a recognized rack pricing point. and this market is now more typical of other large population centres. Since then.80 rank 9 rank 7 rank 10 rank* 10 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. it is likely that this reflected a surplus of wholesale inventory within the local market or region. Price history / Taxation: In the early 1990’s this market experienced frequent and pronounced price war activity.000 179. This is partly due to provincial taxation levels.180 15 86 4.

Winnipeg population # of brands # of outlets outlets per 10.265.217 litres 8. and has remained very close to the Canadian 10-city average. Geographic / Supply / Freight cost considerations: No refining capacity exists within the Winnipeg market. it is an established rack price point. Figure 31: Winnipeg . possibly due to modest ancillary revenue. although there is no study data to support this.ex tax Canada Average . this market is removed from other significant markets. probably related to a regional surplus of wholesale inventory (see Regina). prices have tended to stay somewhat above the Canadian average. On an ex-tax basis. This may reflect a lower than average Consolidated Net Income. Price history / Taxation: In the early 1990’s this market experienced some price war activity. Influence of other markets: Like Calgary.000 616.extax Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 58 . Margin/Throughput relationship (Figure 24): Winnipeg fell within a cluster of markets exhibiting similar margins relative to their throughputs.06 ¢ 0.84 ¢ rank 8 rank* 11 rank* 2 rank* 12 sample size 61 General: The Winnipeg market is characterized by stable.23 rank 6 rank 6 rank 5 rank* 8 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Consolidated net revenue: No ancillary or outlet cost data was available for this market. and therefore experiences no particular influences from any other major market.22 ¢ 7.790 17 261 4. like most markets of this population density.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Winnipeg Rack Price Winnipeg Posted Pump Price RUL Winnipeg Posted Price . although. though somewhat higher than average ex-tax pump prices. Since then. this market has exhibited relatively stable pricing.

placing Nanton well below the expected margin.and a low average outlet throughput.91 ¢ 0.585 4 5 31.41 ¢ 5. Nanton had the second lowest gross product margin of the study group.Nanton. and perhaps healthy ancillary sales associated with highway traffic. more isolated small-town markets.000 litres 5. while others experience consistently high prices. situated on a major North-South highway to the United States Among the study group. in order to maintain a share of the considerable potential sales revenue that passes through this market. the retail gasoline market in Nanton was not restricted to the local population. a feature not available to other. Due to its highway location and its proximity to Calgary. this market has a relatively low freight overhead. Influence of other markets:. Despite its small size. In this respect. Nanton had a high number of per capita outlets . Nanton was perhaps the least viable market in the study group. due to its proximity to one.600. in terms of expected petroleum revenues. Price history / Taxation: In order to attract market share beyond simply the local population. as Figure 24 shows.51 ¢ rank 15 rank* 3 rank* 10 rank* 3 sample size 2 General: Nanton is a farming community approximately 70 km south of Calgary.071.the highest of the entire group . This strategy has had the effect of sustaining a roughly 10 million litre per year retail gasoline market .000 1.far in excess of what would be expected of a community with a population of 1.55 rank 19 rank 17 rank 18 rank* 19 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. would have an offsetting effect. Unlike many of the smaller markets in this study group. Consolidated net revenue: No Ancillary or cost data was available. Its setting on a major highway provides a significant opportunity for attracting highway motorist volume. although not as low as expected. While these conditions would normally result in a high gross product margin. Average outlet throughputs were relatively low. Nanton was the smallest market in terms of population. MJ ERVIN & ASSOCIATES 59 . Margin/Throughput relationship (Figure 24): Like some other small markets in the study group. Geographic / Supply / Freight cost considerations: Located within an hour’s drive of the Calgary rack. Nanton has traditionally priced either at or below Calgary. Some unique characteristics of this market serve to illustrate why some smaller markets experience relatively low pump prices. Alberta population # of brands # of outlets outlets per 10. Nanton appeared to benchmark its pump prices to those of Calgary. it is likely that low operating costs. the Nanton retail gasoline market displayed the same price attributes as a major urban market. While the margin data might suggest that retail gasoline operations in Nanton would not be profitable.

nor is it influenced by. this market has little or no influence upon. its normal rack point. other markets. isolated markets. experiencing relatively high gross product margin and consequently.85 ¢ rank 13 rank* 16 rank* 16 rank* 15 sample size 4 General: Peace River is located at a considerable distance from the nearest source of primary supply. Price history / Taxation: Peace River is typical of small. and was accordingly chosen as a study market. Supply is via tanker truck from Edmonton. further adding to overall high pump prices. In contrast to Nanton. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high.Peace River. Geographic / Supply / Freight cost considerations: At 1.623 litres 12.715 6 8 11.45 ¢ 1. the community of Peace River is subjected to a number of factors which give rise to higher than average prices. high pump prices.000 6. though fairly typical of many smaller. Consolidated net revenue: No Ancillary or outlet cost data was available for this market.157. Peace River has among the highest freight cost in the study group. and due to its isolated locale in northern Alberta. and in fact fell into a tight cluster of four other study markets. Influence of other markets: Since it is not located on a major inter-urban thoroughfare. Alberta population # of brands # of outlets outlets per 10. MJ ERVIN & ASSOCIATES 60 . Peace River also experiences high freight costs. isolated markets.91 rank 17 rank 13 rank 14 rank* 17 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. they were comparable to other markets with similar average throughputs.6 ¢ 10.6 cents per litre.

000 14. MJ ERVIN & ASSOCIATES 61 . Thompson is among the highest freight costs in the study group. It also experienced high freight costs. Other considerations: Like other small markets. the community of Thompson clearly falls into the category of a small. further adding to overall high pump prices. nor is it influenced by. Influence of other markets: Since is not located on a major inter-uban thoroughfare. and due to its isolated locale in northern Manitoba.975 5 6 4. its usual rack point. high pump prices.01 rank 16 rank 15 rank 17 rank* 7 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. this market has little or no influence upon. isolated markets. outlet costs were also modest typical of most smaller markets. remote market. the Thompson market experiences some competitive disadvantage due to its small population base and limited market potential. would have the conflicting effect of reducing the consumer’s choice in a market with a limited choice to begin with. Price history / Taxation: Thompson was typical of small.08 ¢ rank 16 rank* 17 rank* 17 rank* 16 sample size 4 General: Like Peace River. Although ancillary revenues were the smallest of the study group. they were comparable to other markets with similar average throughputs. These factors resulted in relatively strong per-outlet net revenues. A reduction in the number of outlets might seem to be the best way to improve outlet throughput performance. thereby creating the potential for narrower margins. experiencing relatively high gross product margin and consequently. Supply is via tanker truck from Winnipeg. Manitoba population # of brands # of outlets outlets per 10.02 ¢ 11. Thompson is faced with the dilemma. Although outlets in Thompson appear to be as competitive as those of any other study market.1 ¢ 3.02 cents per litre. This however. a significant portion of which would likely be distributed towards supplier overhead costs.014.Thompson.520 litres 14. Margin/Throughput relationship (Figure 24): Although gross product margins in this market were relatively high. Consolidated net revenue: Low outlet throughputs were offset by higher margins. resulting in per-outlet petroleum revenues which were quite typical of many markets. Geographic / Supply / Freight cost considerations: At 3. other markets. and in fact fell into a tight cluster of four other study markets. and reduced pump prices.

this market ranked first in a number of measures: lowest gross product margin.098.extax Toronto Posted Price . New York. similar to that of Montreal. Influence of other markets: This market is continuously linked with several other major retail markets. Consolidated net revenue: Although no study data was available for this market. this market was consistently less than the 10-city average. and is also relatively close to wholesale supply sources in the US. It consequently has a low freight component. exhibiting a lower margin than even expected of an extraordinarily high average outlet throughput. and a resultant low consolidated net revenue.ex tax Toronto Posted Pump Price Canadian Average Posted Pump Price MJ ERVIN & ASSOCIATES 62 . This is likely offset by high operating costs. it had the second highest brand variety of the study group.4 rank 1 rank 2 rank 2 rank* 1 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 5.06 ¢ rank 1 rank* 1 rank* 7 rank* 1 sample size 59 General: Within the study group. stretching from Pickering to Buffalo. Price history / Taxation: 1995 posted pump prices in Toronto did not differ markedly from those of other major Canadian centres.275. In addition.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Toronto Rack Price Canada Average .06 cents per litre. an outlet pumping significantly less than the average 5 million litres annually would not be likely to generate sufficient revenue to remain viable. thus there exists a climate of robust competition. Geographic / Supply / Freight cost considerations: Toronto has nearby refining capacity. Figure 32: Toronto . On an ex-tax basis however. it is likely that outlet ancillary revenues are among the highest in the country.Toronto population # of brands # of outlets outlets per 10. as evidenced by an exceptionally low gross product margin. With an average “blended” gross product margin of only 3. Within this region are thousands of retail outlets. least number of outlets per capita. Margin/Throughput relationship (Figure 24): This market stood apart from the study group.478 litres 3.3 ¢ 3.775 30 546 2.000 2. and first in average throughput per outlet.36 ¢ 0.

Geographic / Supply / Freight cost considerations: As Ottawa is an established rack point.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Ottawa Rack Price Ottawa Posted Price .145 19 209 3. Although petroleum revenues were typical of major markets. ancillary revenue was slightly lower than average. freight costs within this market were quite low. Figure 33: Ottawa . some of which have on occasion priced below Ottawa (see Nanton and Calgary).29 ¢ 5.000 678. Influence of other markets: Although Ottawa is the only major market in the immediate area.Ottawa population # of brands # of outlets outlets per 10. and operating costs were higher than most. margins and prices in Ottawa are typical of markets with similar throughput and net revenue characteristics. rural markets co-exist in this area.ex tax Canada Average .004.extax Canadian Average Posted Pump Price Ottawa Posted Pump Price RUL MJ ERVIN & ASSOCIATES 63 .948 litres 5.97 ¢ 0.08 rank 5 rank 4 rank 6 rank* 4 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 4. This would suggest that it was as competitive as any other major market of similar size and throughput characteristics. slightly lower that expected. several smaller. Other considerations: While pump prices in this market were somewhat higher than in Toronto. and close to the Canadian 10-city average.68 ¢ rank 2 rank* 4 rank* 6 rank* 4 sample size 39 General: Ottawa was very typical of major markets. in fact. exhibiting all of the characteristics of robust competition. Margin/Throughput relationship (Figure 24): This market had the second highest average outlet throughput of the study group with a correspondingly low gross product margin. Price history / Taxation: Pump prices in this market were comparable to other major centres when viewed on an ex-tax basis. Consolidated net revenue: was low.

this Canadian market has some difficulty in remaining both competitive and viable. This would suggest that a significant market share is being lost across the US border. Geographic / Supply / Freight cost considerations: Sault Ste Marie uses Toronto as its usual rack point.Sault Ste Marie population # of brands # of outlets outlets per 10. Margin/Throughput relationship (Figure 24): While this market had the third-lowest per capita outlet population of the study group (behind Vancouver and Toronto). somewhat isolated. MJ ERVIN & ASSOCIATES 64 . and accordingly. average throughputs were modest.51 ¢ rank 6 rank* 12 rank* 15 rank* 9 sample size 12 General: While situated at some distance from its nearest source of rack supply.22 ¢ 7. Pump prices in this market were thus typical of any market with similar throughput characteristics. Sault Ste Marie fell into a cluster of 10 study markets of between 3 to 4 million litres in average annual throughput. yet with some potential for cross-border retail competition. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. a product of relatively strong net petroleum revenues combined with lower than average operating costs.465.475 10 24 2. partly due to higher freight costs. Influence of other markets: This market is close to a US border market.73 ¢ 1. a consequence of the transport distance from the rack point. Freight costs are therefore high. and between 5 to 8 cent per litre in gross product margin. Sault Ste Marie is a sizable market. Consolidated net revenue: This market showed the highest consolidated net revenue of the study group.95 rank 11 rank 10 rank 12 rank* 3 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3.000 81.550 litres 8.

MJ ERVIN & ASSOCIATES 65 . Influence of other markets: This is clearly an isolated market. although high.000 3.76 ¢ rank 19 rank* 18 rank* 18 rank* 18 sample size 2 General: Sioux Lookout was one of the smallest markets within the study group. and outlet throughputs of any market studied.96 ¢ 3. Sioux Lookout is well-removed from any major highway. Price history / Taxation: Ex-tax pump prices were relatively high compared to other Ontario markets. one-seventh the average throughput in Toronto. this market experiences a high degree of price competition. Freight costs are therefore high. largely due to higher freight costs.Sioux Lookout population # of brands # of outlets outlets per 10. brands. Margin/Throughput relationship (Figure 24): Sioux Lookout’s gross product margin. so that virtually all sales volume represents local demand only.2 ¢ 11. was much less than expected for a market of this size.06 rank 18 rank 19 rank 19 rank* 16 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 694. with little or no influence from other retail gasoline markets.310 3 3 9. This is a major factor in the high cost of gasoline in this market. It therefore presents some unique characteristics for the market study. An average outlet in Sioux Lookout pumped only 694. and had the least number of outlets.006 litres in 1995. in fact the second highest in the study group.066 litres 14. Geographic / Supply / Freight cost considerations: Sioux Lookout is normally supplied from the Winnipeg rack via tank truck. despite its high prices. This would suggest that. Consolidated net revenue: No data was available for this market.

pump prices in Montreal have generally been at or below the 10-city average for major markets. this market interacts with several other markets in the region. with resultant low average outlet throughputs.ex tax Montreal Posted Pump Price MJ ERVIN & ASSOCIATES 66 . It therefore represents a highly competitive rack market.88 rank 2 rank 1 rank 1 rank* 11 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3. Montreal was included in the selected market study. Influence of other markets: Like Toronto. Geographic / Supply / Freight cost considerations: Montreal has local refining capacity. This market had the highest tax content of the study group due to high provincial tax rates (in 1996. Figure 34: Montreal . placed Montreal lowest of all study markets in terms of consolidated net revenue.5 cents per litre was introduced into the Montreal area).775. thus promoting a competitive climate. a function of a competitive rack market and an excess of retail outlets competing for market share.144 litres 5.Price History 70¢ 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Montreal Rack Price Crude Oil Price Canadian Average Posted Pump Price Canada Average . This.extax Montreal Posted Price . Montreal nevertheless exhibited a gross product margin which was well below that expected for these throughput attributes. With 32 competing brands.13 ¢ rank 7 rank* 2 rank* 7 rank* 2 sample size 74 General: As the largest retail gasoline market in the Quebec/Atlantic region.000 1. this market ranks first of the study group in terms of brand variety. On an ex-tax basis however. Consolidated net revenue: Montreal outlets had relatively poor ancillary revenues compared to the major market average. Margin/Throughput relationship (Figure 24): This market would appear to be overrepresented in outlets compared to other major markets.43 ¢ 0.870 32 866 4.Montreal population # of brands # of outlets outlets per 10. Price history / Taxation: As the figure shows. an additional tax of 1.394.3 ¢ 5. pump prices in this market have a tendency to be volatile. combined with low petroleum revenues and high operating costs. and is also relatively close to wholesale supply sources in the US.

were quite typical of markets with similar populations.605 14 97 8. Price history / Taxation: Chicoutimi benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border.04 rank 10 rank 8 rank 9 rank* 15 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Margin/Throughput relationship (Figure 24): Outlet throughputs. yet is geographically quite isolated. but as the figure shows. by tank truck.Chicoutimi population # of brands # of outlets outlets per 10. Consolidated net revenue: was average among the study group. Nevertheless.75 cents per litre.250. In the case of Chicoutimi. Gross product margin was accordingly high. both pump and ex-tax prices in this market were higher than average.28 ¢ 1. Geographic / Supply / Freight cost considerations: Although some markets of this size support a viable rack market (Saint John.000 120. but is quite isolated from any other markets. this amounted to a reduction of 5. Chicoutimi is normally supplied from the Quebec city rack. although low.289 litres 12. a partial factor in the high cost of gasoline in this market. Freight costs are therefore somewhat high. within a cluster of other markets with similar attributes.08 ¢ 11. this market has little potential as a rack market. MJ ERVIN & ASSOCIATES 67 .2 ¢ rank 12 rank* 15 rank* 13 rank* 17 sample size 16 General: The Chicoutimi area was somewhat unique among the study markets in that there is a relatively large population base. Influence of other markets: The Chicoutimi / Jonquiere market represents a sizeable population base. for example).

Freight costs are therefore high.50 ¢ 3. Geographic / Supply / Freight cost considerations: Gaspé is normally supplied from the Montreal rack. both pump and extax prices in this market were higher than average. MJ ERVIN & ASSOCIATES 68 . Nevertheless. so that virtually all sales volume represents local demand only.000 16. Influence of other markets: This is clearly an isolated market. this margin was only slightly higher than expected for a market with these throughput attributes. in the case. a key factor contributing to its 14.75 cents per litre.88 rank 13 rank 13 rank 8 rank* 12 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 981.Gaspé population # of brands # of outlets outlets per 10. Consolidated net revenue: No data was available for this market.17 gross product margin the highest of the study group.17 ¢ rank 18 rank* 19 rank* 19 rank* 19 sample size 2 General: Gaspé is a relatively small market. Nevertheless.33 ¢ 14. in fact the highest in the study group. ancillary revenues would likely be modest.900 litres 17. Gaspé is well-removed from any major highway. amounting to a reduction of 5. with little or no influence from other retail gasoline markets.400 6 13 4. Price history / Taxation: Gaspé benefited from a special Quebec tax reduction which applies to certain markets in remote areas and within 20 kilometers of the provincial border. located at a considerable distance from its rack source of supply. Margin/Throughput relationship (Figure 24): This market had the second-lowest outlet throughput of the study group. by tank truck. Although operating costs are likely to be low in a small market like Gaspé. This is a major factor in the high cost of gasoline in this market. a product of high freight costs and gross product margins.

Since provincial taxes are among the lowest in the country.27 ¢ 9.Price History 65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96 Crude Oil Price Saint John Rack Price Canadian Average Posted Pump Price Saint John NB Posted Pump Price RUL Saint John Posted Price . Consolidated net revenue: was average for the study group. Influence of other markets: Although rack pricing is potentially subject to influence from other Atlantic coast terminals. Figure 35: Saint John NB .000 74. freight costs in this market are low. this market fell within the expected range of gross product margins as a function of outlet throughput. with or without a local refinery. The only real benefit that a local refinery provides is the modest rack-to-outlet freight cost factor.79 ¢ 0.Saint John NB population # of brands # of outlets outlets per 10.extax MJ ERVIN & ASSOCIATES 69 .970 9 56 7. and therefore. resulting in lower than expected average outlet throughputs. and is capable of shipping and receiving wholesale product through marine facilities. Margin/Throughput relationship (Figure 24): Saint John is somewhat over-represented by retail outlets. Geographic / Supply / Freight cost considerations: Saint John is home to a large regional refiner. That a major refinery resides in this market might suggest that these prices should be among the least in the country. which for Saint John. posted pump prices in the Saint John market have closely followed the 10-city average.095. Price history / Taxation: Historically. the Saint John retail market is relatively isolated from other retail markets of any significance. ex-tax prices were relatively high. do not differ markedly from any other rack point in the study group.ex tax Canada Average . Saint John presents some unique characteristics for the market study.694 litres 9. Nevertheless.47 rank 12 rank 11 rank 11 rank* 14 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 2. Average gross product margin was consequently high. it is an established rack point. retail pump prices are ultimately a reflection of rack prices. reflected in the high ex-tax pump price.52 ¢ rank 14 rank* 13 rank* 4 rank* 13 sample size 17 General: As a major refining centre in Atlantic Canada. In fact. Accordingly.

Halifax
population # of brands # of outlets outlets per 10,000 330,845 9 113 3.42 rank 7 rank 11 rank 7 rank* 5 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 3,058,010 litres 6.0 ¢ 0.27 ¢ 5.73 ¢ rank 11 rank* 5 rank* 4 rank* 5

sample size 18

General: As the largest population centre in Atlantic Canada, Metro Halifax was included in the selected market study. Geographic / Supply / Freight cost considerations: This market is served by a number of regional refineries, including one situated locally. Its marine port status allows for the potential import of refined product from any one of several refiners on the US east coast or western Europe. Influence of other markets: The Halifax/Dartmouth market represents a sizable population base, with a commensurate representation of retail outlets. It is relatively isolated from other retail markets of any significance. Price history / Taxation: For a number of years until mid-1991, retail pump prices, numbers and types of outlets and pump service (full vs self-serve) were regulated by that province’s Public Utilities Board (PUB). This structure was likely responsible for the historically high pump prices that existed in this market until late 1992. Since then, pump prices have generally fallen to reflect market conditions, and have on occasion, experienced price war activity, most notably in 1996, where at times, prices fell below the posted rack (wholesale) cost. Margin/Throughput relationship (Figure 24): Halifax exhibited a gross product margin well below that expected for these throughput attributes. While product margin ranked 5th lowest in the study group, outlet throughput was disproportionately low, ranking 11th. Consolidated net revenue: No data was available for this market.

Figure 36: Halifax - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Apr-92 Apr-93 Apr-94 Apr-95 Apr-96 Oct-92 Oct-93 Oct-94 Oct-95 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Oct-96 Jul-92 Jul-93 Jul-94 Jul-95 Jul-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Halifax Posted Pump Price RUL

Halifax Posted Pump Price - ex tax Canada Average - extax

MJ ERVIN & ASSOCIATES

70

Charlottetown
population # of brands # of outlets outlets per 10,000 15,395 5 23 14.94 rank 15 rank 15 rank 13 rank* 18 avg outlet volume/yr 95 mktg mrgn freight 95 prod mrgn 1,890,648 litres 11.17 ¢ 1.14 ¢ 10.03 ¢ rank 17 rank* 14 rank* 14 rank* 14

sample size 4

General: As PEI is the only province that regulates gasoline prices, Charlottetown was included in the study group to derive some insights into its possible effect on competitiveness. Geographic / Supply / Freight cost considerations: This market receives marine supply, usually from Halifax, but often from one of several marine terminals in the region, including Saint John, Quebec city or Montreal. Influence of other markets: Due to its island setting, retail consumers have little opportunity to shop adjacent markets for the lowest-priced gasoline. Price history / Taxation: Charlottetown has perhaps the consistently highest ex-tax pump price of any urban market in Canada. Margin/Throughput relationship (Figure 24): Charlottetown is probably over-represented by retail outlets, resulting in lower than expected average outlet throughputs. Average gross product margin was consequently high, reflected in a high ex-tax pump price, although it was comparable to other markets with similar throughputs. Consolidated net revenue: No data was available for this market. It is unlikely that the removal of price regulation would result in pump prices any higher than already exist in this market. Competitive disadvantages which exist in PEI markets are shared with many other non-regulated markets which exhibit a pattern of lower prices. Therefore, there is likely no consumer benefit, and there may be some detriment attached to the PEI regulatory structure, as evidenced by its pricing history and that of Halifax. Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness, and likely a negative impact on consumers.

Figure 37: Charlottetown - Price History
65¢ 60¢ 55¢ 50¢ 45¢ 40¢ 35¢ 30¢ 25¢ 20¢ 15¢ 10¢ 5¢ Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jul-92 Jul-93 Jul-94 Jul-95 Apr-92 Oct-92 Apr-93 Oct-93 Apr-94 Oct-94 Apr-95 Oct-95 Apr-96 Jul-96 Oct-96
Crude Oil Price Halifax Rack Price Canadian Average Posted Pump Price Charlottetown Posted Pump Price RUL

Charlottetown Posted Price - ex tax Canada Average - extax

MJ ERVIN & ASSOCIATES

71

Part E

Findings, Conclusions & Recommendations
This Retail Petroleum Markets study meets the study objectives of: • • • • providing a sound database for policy direction; providing a means to better understand competitive opportunities and challenges; assessing the viability and competitiveness of regional markets; and determining key competitiveness factors in specific markets.

The study thus provides a tool to understand the dynamics of this vital and complex industry, and a foundation for effective policy development.

Findings
This study presented twenty-two findings which are derived from the pump price model analysis, historical evaluation of pump prices and margins, and specific market analysis: Finding 1: Refiner and Marketing Margins are a consequence of their defining prices, in turn determined by competition on a continental (Rack Price) or a local (retail pump price) scale............................................................................................. 7 Finding 2: 1996 average crude price, as a factor of the regular gasoline retail pump price, was 19.1 cents per litre, or roughly 34 percent of the pump price................... 9 Finding 3: The infrastructure of the Canadian refiner sector provides the necessary conditions required for competitive, market-driven Rack (wholesale) pricing of petroleum products................................................................................................... 11 Finding 4: In 1996, petroleum taxes accounted for 50.3 percent of the average urban price of regular gasoline in Canada................................................................ 17 Finding 5: In 1996, the average Gross Refiner Margin available to Canadian petroleum refiners to provide for all operating costs and profits on the manufacture of regular gasoline, was 5.3 cents per litre............................................................... 17 Finding 6: In 1996, the average Gross Product Margin available to Canadian petroleum marketers to provide for all operating costs and profits on the sale of regular gasoline in a typical urban market, was 3.5 cents per litre. ......................... 17 Finding 7: Price uniformity and price volatility, facilitated through street price signs, are indicators of a competitive market........................................................... 21 Finding 8: Some competitiveness inhibitors may exist in the retail gasoline market which are regulatory in nature, but exist to meet other important societal needs.... 23 Finding 9: Pump prices are established by the local dealer at over half of all retail outlets in Canada. ..................................................................................................... 28 Finding 10: Gasoline has remained at or below the “all items” Consumer Price Index nine out of the past ten years.......................................................................... 31

MJ ERVIN & ASSOCIATES

72

.... the residual represented a net loss to the supplier......... reduced pump prices......... which in turn. and likely a negative impact on consumers. 52 Finding 22: Some instances of direct government intervention into petroleum marketing have been shown to have a possible adverse effect on competitiveness............ Taking into account the possible discounts from posted rack prices and independent brands’ lower marketing overheads............... 32 Finding 12: Retail pump price increases from 1994 to 1996 are wholly attributable to increases in petroleum product taxation and crude costs......... these ancillary operations contributed to a lower product margin and consequently................ 48 Finding 19: Based on published rack prices.................................... particularly in comparisons of major urban markets to small........ remote population centres................51 Finding 21: Based on published rack prices and the individual outlet data...... The study average retail gasoline outlet would have experienced a net loss without the contribution of ancillary operations............ residuals for outlets not studied may be better........................................ ......... 33 Finding 14: Canadian retail gasoline pump prices are the competitive equal to those of the US.................. ....... a feature of most market-regulated commerce...................................... . 43 Finding 17: Market-specific differences in product freight are a key factor in intermarket ex-tax pump price differences.............. 33 Finding 13: From 1991 to 1996. ..... when compared on an ex-tax basis............................................................... the average tax content of regular gasoline pump prices in major Canadian cities increased by about 5 cents per litre... while average combined Gross Refiner and Gross Marketing Margins decreased by about 7 cents per litre......................................... 37 Finding 16: Provincial differences in product taxation are a predominant cause of inter-regional pump price differences.......................................... petroleum sales revenues alone were insufficient to cover operating costs for the 481 outlets studied.................................................. 35 Finding 15: Seasonal fluctuations in retail pump prices are ultimately linked to wholesale product inventory levels................. In effect.......... 45 Finding 18: After accounting for differences in taxation and freight the remaining difference in retail pump prices between markets is very closely linked to market differences in average sales volumes such that markets with low Gross Product Margins are associated with high outlet throughput volumes.................. after the average 1995 consolidated revenues were distributed to meet dealer income and the supplier’s marketing overhead requirements.... 50 Finding 20: For the 481 individual outlets studied....Finding 11: Retail pump price trends are principally a reflection of changes in the underlying rack (wholesale) price of petroleum products.......... 71 MJ ERVIN & ASSOCIATES 73 ............ ............ the profitability of the 481 outlets studied appears only marginal....................... ............. given the possibility of discounts from posted rack prices and potentially lower overhead costs.. while those with high Gross Product Margins tend to have low outlet throughputs. which ensures a competitive product price for buyer and seller alike..... are principally a reflection of changes in the underlying price of crude oil........... The viability of the Canadian retail gasoline sector as a whole may be somewhat better.....................................

1. Rack and pump prices are determined in competitive marketplaces. Critical to the overall success of this study was the development of a model which would create a common frame of reference for the considerable terminology that accompanies an industry as complex as Canada’s petroleum sector. was shown to be strongly competitive: • A long-term decline in pump prices. Closer examination of these strategic tools might yield additional insights into the nature of competition in this industry sector. The study presents such a model. On a national level. The economic relationship of the petroleum marketing sector with its related stakeholders is a complex one. Virtually all of the competitiveness indicators examined in this study relate to price. • • These findings are likely in sharp contrast to a common public perception of this industry in general and price trends in particular. over the long term. each with unique dynamics. The contrary notion that a given refiner or marketer is free to establish a price based upon a minimum margin requirement. in comparing Canada average (city) pump prices to those of the United States. price is but one of four competitiveness “tools” available to marketers (product. 2. place.Conclusions The study findings lead to a number of conclusions relating to the competitiveness of Canada’s petroleum marketing sector. which also serves to illustrate the interrelationships between the various stakeholders who ultimately receive the revenue from the sale of a litre of gasoline. which at times can decline to very low or MJ ERVIN & ASSOCIATES 74 . the very margins within which this industry operates has. is mistaken. a consistent pattern of competitiveness emerged when comparing product margins to their associated average outlet throughputs (Finding 18). In comparing several diverse markets. was observed (Finding 10). Canadian prices have been at or below US prices in recent years. a variety of available data suggests that a state of vigorous competition exists in the Canadian petroleum marketing sector. and promotions are the other three). The resultant margins. This has not simply been a result of a decline in underlying raw materials costs. Although an objective measure of competitiveness is elusive. The Canadian retail petroleum products industry. when measured in constant and nominal dollars. exhibited a diminishing trend (Finding 13). This price/margin model illustrates that the various sector margins are a consequence of the prices at which feedstock or wholesale product is bought and then sold (Finding 1). by all objective measures available to this study. As described in this study however. when taxes were excluded (Finding 14).

or 6 percent (Finding 6) of the 1996 average regular pump price. and in some markets. vary considerably from one population centre to another. Petroleum product taxes are levied at the federal. 3. provincial. these markets have managed to sustain a certain level of viability and competitiveness. the resultant margins were found to display a distinct relationship with average outlet throughputs for each market. The measurement and analysis of the effect of petroleum taxation levels in Canada compared to other countries is well beyond the scope of this study. the responsibility for deciding upon retail pump prices was shown to reside principally at the local dealer level (Finding 9). A much more accurate barometer of industry competitiveness would therefore be the rack-to-retail or gross product margin. In applying such a model to the retail petroleum marketing industry. when the “outside” factors (tax. for example) were rationalized. MJ ERVIN & ASSOCIATES 75 . The demonstrated exception to this is in markets directly adjacent to nearby US markets. and are a predominant cause of inter-regional pump price differences (Finding 16). municipal levels of government.even negative values. and do. are thus a reflection of the state of product supply. taxation differences between Canadian and US markets.3 cents or 9 percent (Finding 5). rack price and freight cost. measured against the average outlet throughput for that market. but given its magnitude. Dealers were shown to have a variety of relationships with their supplier. This implies that the competitive dynamics pertaining to these retail markets can. This study’s analysis of NRCan urban regular gasoline prices shows that the tax content in a typical consumer’s gasoline purchase is about 50 percent (Finding 4). and accordingly. Due to the localized nature of competition in the retail gasoline marketing sector. This would entail the tracking of not only pump price. particularly smaller ones. and in some markets. well over half of all outlets in Canada operate as lessees or independents. presents a competitive disadvantage to Canadian marketers. While some markets. it is important to understand that. The latter two can vary considerably from one market to another. but even in such cases. but also rack prices and outlet performance. retail petroleum markets are considered local (municipal) in scope. crude costs accounted for roughly 34 percent (Finding 2).5 cents. and product margins accounted for 3. By contrast. since this is the effective range of consumer choice. demand and other competitive factors existing at the time. Taxation is a significant factor in the price of retail gasoline. refiner margins accounted for 5. but not beyond the reach of any organization wishing to truly understand petroleum competitiveness issues. taxation as an element of public policy is an area worthy of additional research. generally do not serve as competitiveness inhibitors. experienced higher than average pump prices. while crude oil markets are considered global in scope and rack product markets are considered regional in scope. or even between Canadian markets with differing tax structures. an exercise that consumers are unlikely to engage in.

is available to provide for all retail marketing operations including outlet costs. which in turn is the principal driver of ex-tax pump prices. the absence of price war activity does not imply a lack of competitiveness. MJ ERVIN & ASSOCIATES 76 . showed a close relationship to underlying crude prices (Finding 11). Rack prices were shown to not significantly differ between major centres. This margin represents gross revenue (after wholesale product and freight cost) which. which in turn. constitute a small portion of the retail pump price. on the basis of price fluctuation alone. This consolidated outlet revenue. incorporated with ancillary revenues and outlet costs. the Canadian retail marketing sector realized an average gross margin of 3. While price wars are undoubtedly an indicator of competitiveness. on a per litre basis. While these findings are somewhat qualified in terms of this study’s use of posted rack prices as the derivation basis. Sioux Lookout. when distributed these three ways (Finding 20).Canadians nevertheless enjoy one of the lowest average gasoline taxes in the industrialized world. when examined on the margin-volume model. 5. second only to the United States. and a loss in the case of urban markets. The pump price/margin model shows that in 1996. This relationship between price and demand was cited as the essence of competitiveness in the petroleum rack marketplace. supplier costs and profitability. Retail pump price changes showed a close relationship to underlying rack prices. Viewed from this perspective. which represent the majority of Canada’s population base. This study’s marginvolume model could detect no difference between price-volatile markets such as Toronto. it can still be concluded that the petroleum marketing sector constitutes a small portion of the total retail pump revenue distribution. predictable seasonal pattern. translates into supplier profits of an estimated one cent per litre of petroleum sales in the case of smaller markets. In fact. a price-stable market. fluctuating prices are a strong competitiveness indicator (Finding 7). and more price-stable markets such as Sioux Lookout. Retail gasoline marketing revenues. exhibited competitive traits typical of any of the study markets. Retail pump prices showed a corresponding seasonal pattern.5 cents per litre on the sale of regular gasoline in a typical major urban market (Finding 6). Demand for gasoline was shown to vary significantly according to the time of year. further suggesting that a strongly competitive environment exists in the refiner sector as well (Finding 3). dealer income. Pump price fluctuations can be an indicator of competition in the marketplace. 4. reflecting consumer demand behavior (Finding 15). in a highly distinct.

Indeed. this industry sector would have realized profits of unprecedented proportions. these findings clearly show that pump price increases are ultimately linked not to increased profits. MJ ERVIN & ASSOCIATES 77 . Industry profitability is extremely sensitive to very small changes in pump price. serve as perhaps the most significant indicators of competitiveness in the downstream industry. Thus. crude costs. assuming all other costs were unchanged. profit margins in this sector can be stated to be in the order of 1 to 2 cents per litre in a “good” year. Declining refiner and marketing margins. pump price signs are particularly ineffective as a barometer of petroleum marketer competitiveness and profitability. despite increases in tax content and crude costs (Finding 12). Thus. Also. improving retail outlet performance through outlet rationalizations (closures) resulting in higher unit throughputs (sales volumes). Nevertheless. including: • • • improving production efficiency through refinery plant rationalizations (closures). Changing conditions in Canada’s downstream petroleum sector have caused retail pump prices to remain relatively flat since 1992. in the long term these fluctuations are likely more reflective of market restorations. the combined downstream (refiner and marketing) margin in Canada decreased by about 7 cents per litre (Finding 13). A truly objective barometer of downstream industry influence on retail pump price lies in the measurement of margin. This trend has both resulted in. and the marketing sector in particular. While these economics might appear to place this industry in a position of poor viability. several competitive strategies. based upon an assumed posted rack price. and has been a result of.6. if Canadian average pump prices were only one cent higher than they were in 1995. Also. emphasis on ancillary revenue sources as a means to augment petroleum revenue and offset outlet operating costs. most outlets used in the 19-market study represent major integrated oil companies. and the associated industry initiatives which are ongoing in nature. but to increases in underlying rack prices. the rack price basis used in this study probably understates actual revenues by about 1 to 2 cents per litre. 7. intense competitive pressures in the downstream industry in general. although pump prices in some markets can fluctuate by several cents per litre in the course of a week. Both the downward trend in margins. and have resulted from. not price. Since 1991. have caused. despite the predisposition of many observers to use them as such. and in turn. Annual residual profits available to petroleum marketers is in the order of perhaps one cent per litre. both of which are beyond the direct influence of Canada’s oil companies. not excessive profits. It is likely that regional and nonrefiner marketers operate with somewhat smaller overhead costs than those used in this study.

Thus. average pump prices were relatively high. regardless of size. MJ ERVIN & ASSOCIATES 78 . This created some economic pressure to sell product at a higher pump price. While competitiveness in most smaller markets was shown to be as active as in larger centres. in order to generate sufficient revenue to cover the outlet’s fixed operating costs. The costs of most consumer goods in smaller. which could actually inhibit competition. reduce pump prices.8. Smaller. A wide range of petroleum gross product margins were evident within the 19market study group. Although some smaller markets appeared to have higher gross product margins than larger markets. High distribution costs Smaller markets are generally further removed from their source rack point than larger centres. most markets. there are three points to consider: • In very small markets. and this study showed that gasoline prices were no exception. likely due to the different geographic and lifestyle differences that exist in small communities compared to major cities. poor outlet throughputs were generally the predominant factor. from 3 cents per litre in Toronto to 14 cents per litre in Gaspé. isolated markets face particular challenges: although found to be highly competitive. a distinct pattern emerged: an inverse relationship between retail gross product margin and the average outlet throughput associated with that market (Finding 18). according to the margin-volume model. Outlet throughput is a key determinant of inter-market pump price differences. • • At first glance. the solution would be to encourage some dealers to exit the market. and therefore suffered an additional distribution cost disadvantage of about 2 cents per litre on average (Finding 17). which should. This was due to three factors: • Low average outlet throughputs The average group B outlet sold approximately 1. had petroleum margins which were commensurate with average outlet throughput for that market. more isolated markets are generally higher than in larger centres. it would seem that if local government in smaller markets were interested in lowering pump prices.5 million fewer litres of gasoline than a group A (major centre) station. 9. thereby improving petroleum volumes and ancillary revenues at the remaining sites. virtually all of the 19 study markets exhibited similar levels of competition. although this study provides comprehensive evidence of this. other factors exist which contribute to relatively high margins and prices. When plotted against the margin-volume model. That such a relationship should exist was not surprising. When these margins were compared to their corresponding outlet throughputs. Low ancillary revenues Outlets in smaller centres received significantly less ancillary revenue than their group A counterparts. In suggesting this approach however. reducing the number of outlets may also reduce the number of competitors.

is well beyond the scope of this study. This competition then. depressed petroleum revenues below that of outlet operating costs. The federal Competition Bureau for example. and the perceived effect on their markets. many national and local environmental regulations exist for good cause. were cited as examples of ways in which outlet petroleum sales are augmented by other revenues. The historical record is clear however: since deregulating pump prices. and likely others in Nova Scotia. This is not to say that all direct government intervention into marketing practices is certain to produce undesirable results. Government intervention into petroleum marketing is likely a poor alternative to market-based regulation. Charlottetown. as marketers find even more innovative ways to attract market share. is viewed as an agency which exists to the benefit of industry and consumer alike. and the traditional automotive service bay. The loss of employment represented by a station closure may be of some concern to smaller communities. are an acceptable limitation on pure competition (Finding 8). MJ ERVIN & ASSOCIATES 79 . and in turn.• A full-serve retail gasoline outlet typically employs 3-5 staff. the Halifax market. As these findings show. will likely preserve a highly competitive petroleum market. in order to build upon the findings in this study towards a full understanding of the dynamics at work. • The particular competitiveness and viability issues facing smaller markets is an issue worthy of further study. Ancillary or non-petroleum revenue is described as an increasingly important feature of the retail gasoline marketing demography (Finding 19). A full analysis of the various features of the Nova Scotia and PEI regulatory structures. is both the cause and consequence of increased activity in ancillary operations. has seen a decline in pump prices relative to other Canadian markets. and as such. Non-petroleum revenues at retail gasoline outlets will continue to gain prominence. the degree of price competition in the retail petroleum has in effect. 10. Convenience store. This will be driven by the depressed petroleum product margins which currently exist in the petroleum marketing sector. The 19-market study provides some insights into the issue of whether or not regulated retail gasoline markets serve to benefit consumers (Finding 22). does not appear to benefit in consumer terms. characterized by narrow product margins and relatively flat pump prices. Also. 11. under the current PEI regulatory structure. Retail ancillary operations are a critical element of petroleum price competition. Some impediments to market exit may exist in the form of petroleum underground storage tank regulations which may present to the operator the option of pumping gas as the better alternative to decommissioning the site and possibly incurring prohibitive remediation costs. car wash.

possibly to the detriment of the consumer. Research into the specific competitiveness issues of concern to consumers would provide valuable direction for groups conducting industry competitiveness research. and the converse image held in much of the public domain. Individual companies within the retail petroleum industry have been reluctant to speak directly to the issue of gasoline pricing and competitiveness. margins and competitiveness factors. This study might be used as the concept basis for a comprehensive annual update of price/margin trends and selected market competitiveness research. Ways in which this gap can be closed might include: • Ongoing third party evaluation of prices. would ultimately be reflected in carefully-considered public policy which serves to truly enhance. Improve public understanding and awareness of competition in the petroleum marketing sector. A regular comprehensive competitiveness evaluation. that where a healthy competitive climate exists. in a simple format designed for consumers and legislators. direct regulatory interventions may have an adverse effect on competitiveness. This study alludes to several potential study initiatives which go well beyond the objective of public awareness and may assist both the public and private sector policy and strategic directions: MJ ERVIN & ASSOCIATES 80 . Industry and government have an opportunity to continue to work together in cooperative research similar to that which this study represents. as it does in the Canadian petroleum marketing sector. 1. This should be in the form of a quarterly summary of price trends and related measurements. petroleum marketing competitiveness. Develop cooperative industry research into marketing sector competitiveness issues. Public perception measurement.This study proposes rather. • • Would this enhance the competitiveness of this sector? It is felt that better public understanding of this industry’s record of competitiveness. and the nature of competitiveness influences. 2. not inhibit. Organizations such as the Canadian Petroleum Products Institute and the Petroleum Communication Foundation would therefore have an expanded role to play in commissioning and regularly disseminating the results of these recommended initiatives. A recurrent theme arising from this study’s conclusions is the likely gap that exists between the demonstrably high level of competition within this industry sector. Recommendations This study advances two recommendations to enhance the existing competitiveness in Canada’s petroleum marketing sector.

A better comprehension of the true issues and opportunities facing this industry would be an important step in the right direction towards stable and effective policy.• Price/Margin Modelling: Development and adoption of a standard price model and associated terminology by industry/government. and regulators alike. is vital if Canadians are to put in place the structures that truly meet their social and economic needs. using Canadian and foreign selected markets. and in particular. Lack of understanding of this industry can lead to misguided policies which benefit neither the industry nor the consumer. using Canadian and foreign selected markets. Taxation: An analysis of taxation levels on industry and consumer behavior and as a tool of policy and revenue. • • • • * * * Better understanding of this industry. Small Market Competitiveness: Detailed research into small market outlet economics and competitiveness. Regulatory Intervention: Historical and theoretical research into government regulation of petroleum markets. the possible effect of underground storage tank legislation as a potential barrier to market exit and competitiveness inhibitor. Marketing Strategy Effectiveness: Research into price and non-price marketing strategies and their relative influence on consumer response. using Canadian and foreign selected markets. and issues/opportunities facing such markets. by industry. along the lines of the model used in this study. MJ ERVIN & ASSOCIATES 81 . consumers.

Appendices MJ ERVIN & ASSOCIATES 82 .

Lessee .Canadian Petroleum Products Institute. There are several modes (see below) of dealer operation. etc.the segment of the oil industry involved in the refining and/or marketing of petroleum products such as gasoline.an organization who sells refined petroleum products to end-use consumers. and therefore purchases its supply of petroleum product from an outside source. diesel. and included in the retail pump price.. and purchases petroleum products from the same supplier for resale at a pump price determined by the lessee. Integrated Oil Company . in cents per litre. municipal tax levees. These product taxes include Excise tax.. of transporting petroleum product from the rack point to the final point of sale. lubricants. such as a retail gasoline outlet. but inclusive of any corporate taxes on earnings. which serves as the voice of the petroleum products industry in Canada on environment. health.a federal tax on retail gasoline purchased by domestic (ie: motor vehicle) consumers. provincial pump tax. Grade Differential . service bays. Major Oil Company .the retail price of gasoline that would be displayed if all product taxes were removed. Downstream . safety and business issues. and in some regions. The ex-tax pump price is exclusive of these taxes. Distribution Costs . currently established at 10¢ per litre. MJ ERVIN & ASSOCIATES 83 . an association of petroleum refiners and marketers.a service provided in addition to the basic retail petroleum sales operation. generally expressed in cents per litre. for example. such as lessees. Usually expressed on a per-unit basis. car wash. CPPI .a petroleum marketer which is involved in both the upstream and downstream aspects of the oil industry.a generic term referring to a retail outlet operator. and commission dealers.I Glossary of Terms Ancillary service . Ex-tax Pump Price . Excise Tax .the difference in pump price between a premium or mid-grade of gasoline vs. such as a major oil company or regional refiner/marketer. such as convenience goods. the regular unleaded pump price. etc. Independent Petroleum Marketer . Margin .a petroleum marketer who is not involved in the refining of petroleum products.(for the purpose of this study) the cost. Dealer .a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in most or all of Canada’s provinces. independent dealers. GST.the difference which exists between net sales and the cost of merchandise sold and from which expenses are usually met or profit derived. Marketer .a particular mode of retail petroleum operation where the outlet operator (dealer) leases the retail outlet from the product supplier.

the raw material from which petroleum products are manufactured.an organization who.the volume (ie: in litres) of petroleum sold at a retail outlet in a given period.within the context of retail gasoline marketing. Supplier .the point at which title to refined product is transferred from the refiner to the supplier. with a non-advocacy mandate to improve public awareness of Canada’s petroleum sector. Regional Refiner/Marketer . lessee.a petroleum organization involved in both the refining and marketing of petroleum products which has marketing operations in a limited number of provinces. these can be broadly classified as company operated. or at one on several loading terminals (usually in major population centres) where petroleum is marketed to non-refiner supplier/marketers at posted rack prices. commission dealer. an association of upstream and downstream oil companies and related organizations. the supplier has initial title to the petroleum product as it leaves the rack point. MJ ERVIN & ASSOCIATES 84 . Rack Price . In the retail gasoline sector. Refiner .the wholesale price posted at the rack point. This may be at a refinery loading terminal. Although in theory the transfer price could be set at any arbitrary value. usually per month or per year. manufactures (from crude oil) a range of petroleum products suitable for consumer use. it is usually based on the market-driven rack price. and independent dealer.the type of contractual relationship between the supplier and the dealer (outlet operator). PCF . is typically also the brand name owner of the chain of gasoline stations to which it supplies refined petroleum products. Rack Point .the segment of the oil industry involved in the exploration and/or production of crude oil. Upstream .Mode .Petroleum Communication Foundation. Throughput . Transfer Price .the internal price paid by an integrated refiner/marketer to its own refinery for refined petroleum products.

using a weighted (by provincial gasoline demand) 10 city average.0 97.2 45.0 1991 126.9 1995 133.1 87.4 134.4 124.4 57. Nominal (¢/litre) (2) RUL Ex-tax Price.7 124.9 115.5 124.4 110.3 27.6 136.3 55.0 115.5 49.6 91.7 96.3 52.2 39.3 1992 128.0 1988 108. 1986 Constant (¢/litre) (3) 1986 100 100 100 100 100 100 100 100 100 100 100 47.9 26.3 151.9 1994 130.9 26.8 1987 104.3 19.2 127.2 92.3 115.1 120.4 152.1 126.4 104.2 112.7 132. Nominal RUL (Regular Unleaded) price and ex-tax price is from Natural Resources Canada.7 Note 1 Note 2 Note 3 Price Index data is from Statistics Canada Cat.5 115.7 122. Constant dollar RUL gasoline values were derived by applying the “All Item” CPI to the nominal price for that year.5 120.4 45.4 104.3 96.1 115.2 99.3 1989 114.3 141.5 111.2 20.2 30.8 132. Nominal (¢/litre) (2) RUL Annual Price. No.4 120.9 118.1 104.9 155.7 123.5 100.8 104. 62-010: Consumer Prices and Price Indexes.0 104.0 102.4 27.8 94.1 26.II Source Data Tables Table A: CPI Index: Selected Goods and Services Year **All Items** (1) Food Shelter Natural Gas Fuel Oil Telephone Gasoline Auto Repair Alcoholic Beverages Domestic Water Domestic Electricity RUL Annual Price.5 145.9 1993 130.6 133.3 40.2 133.2 109.3 119.3 160.1 151.7 29.2 45.1 97.7 22.8 130.1 117.5 25.7 30.8 93.4 97.5 126.2 31.1 117.9 97.6 51.8 135.1 104.3 132.0 93.8 108.6 92.3 134.3 139.5 112.1 40.6 122.0 19.9 122.5 30.1 167.2 49.1 120.4 136.1 1990 119. 1986 Constant (¢/litre) (3) RUL Ex-tax Price.2 50.2 142.8 95.7 95.3 125.8 47.4 34.0 42.1 146.4 122.0 30.8 28.3 58.0 111.2 121.6 107.7 54.9 108.7 118.1 103.8 106.0 93.4 29.1 48.1 144.5 94.0 32.4 53. MJ ERVIN & ASSOCIATES 85 .1 105.3 122.0 135.

2 65.9 58.8 26.4 57.9 22.9 31.8 23.8 57.6 5.3 4.5 27.7 63.4 22.7 14.2 5.3 56.0 16.5 27.4 33.3 66.1 23.9 23.7 7.7 29.6 13.2 7.2 63.8 30.0 26.7 6.9 4.7 33.8 14.9 14.4 14.1 53.2 23.9 6.0 7.0 52.3 9.7 18.2 21.0 33.5 25.5 5.6 4.0 26.6 6.9 25.2 7.2 27.3 58.2 13.9 7.1 24.4 58.0 16.6 52.3 5.9 55.9 26.6 18.7 25.2 25.0 24.9 23.1 22.9 13.7 34.8 15.7 31.5 7.2 23.1 7.5 54.3 13.3 57.0 24.4 31.7 12.3 26.4 56.0 24.2 13.5 11.8 55.0 24.2 26.5 23.9 6.0 16.3 13.8 26.5 Gross Marketing Margin Gross Refiner Margin 53.4 12.3 13.4 14.5 14.3 6.4 30.9 8.5 35.4 8.8 14.5 28.2 27.7 14.8 53.4 MJ ERVIN & ASSOCIATES 86 .6 26.2 8.6 25.0 13.0 54.4 20.3 15.0 20.8 28.2 56.6 25.7 19.7 4.6 9.4 7.5 30.8 21.1 29.7 7.9 30.2 6.Table B: Key Price / Margin History .4 15.4 26.9 25.8 14.4 9.0 24.7 14.0 10.9 17.3 22.9 9.9 56.0 16.6 54.6 23.3 6.1 25.1 16.9 25.7 15.0 22.7 39.1 18.0 4.7 29.1 13.2 7.6 28.2 16.9 23.8 9.7 28.9 25.8 13.0 5.5 57.4 14.7 4.3 13.9 53.1 21.1 16.4 53.6 7.8 23.7 19.4 14.3 14.9 15.2 24.4 34.5 6.5 10.5 10.8 8.5 19.1 16.5 26.7 4.6 26.3 25.1 53.5 15.2 13.5 26.2 22.7 58.8 22.2 13.0 7.4 26.6 8.4 29.2 25.4 26.9 53.4 21.9 54.7 7.6 23.3 24.3 26.2 41.7 18.0 24.5 32.2 11.0 24.0 26.2 26.7 29.1 13.5 56.7 13.1 23.2 27.2 16.8 11.0 55.0 28.9 12.1 13.0 9.4 24.8 16.8 55.1 52.6 54.7 14.1 22.3 56.5 31.9 21.7 8.2 12.3 23.1 19.3 17.3 54.7 14.Regular Gasoline RUL Canada Avg Jan-90 Feb-90 Mar-90 Apr-90 May-90 Jun-90 Jul-90 Aug-90 Sep-90 Oct-90 Nov-90 Dec-90 Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 30.8 24.4 13.5 7.9 7.3 13.8 8.0 15.1 16.9 56.1 17.8 29.3 54.8 53.8 14.8 33.3 42.4 31.6 54.3 22.0 7.1 18.1 7.9 55.5 22.0 8.2 14.9 4.6 26.2 4.9 24.1 23.2 6.9 14.5 23.4 24.5 33.6 21.0 25.7 23.3 54.2 15.7 Downstream Margin 14.6 13.0 14.4 55.4 13.5 16.5 8.8 21.1 9.8 25.5 23.7 24.9 7.7 32.6 20.0 12.6 24.0 25.2 29.9 26.9 11.3 15.4 32.5 14.3 Tax Content 23.2 7.9 25.2 14.1 39.3 12.1 5.9 6.

1 26.6 20.1 10.3 4.2 54.7 13.0 24.7 18.8 23.5 15.0 26.2 12.7 26.7 7.6 27.3 26.1 54.6 9.0 28.5 6.2 49.0 12.6 11.6 3.1 3.4 6.1 14.6 10.3 25.7 5.7 53.4 25.8 50.5 23.3 7.0 53.2 14.1 6.1 11.4 15.5 6.4 21.6 15.6 4.0 6.7 6.8 6.4 5.2 28.2 Gross Marketing Margin 4.5 21.1 14.2 23.8 28.3 21.6 23.9 23.3 9.5 9.8 4.7 14.9 19.3 53.4 26.9 29.6 20.0 28.8 49.2 7.1 11.9 49.5 5.5 53.3 54.0 6.5 21.1 6.4 26.7 14.3 13.5 55.3 55.3 7.8 23.9 Downstream Margin 12.1 57.5 11.1 20.2 14.5 7.6 16.9 4.3 23.7 5.7 53.4 16.3 28.3 28.3 58.3 12.1 15.7 13.9 26.2 26.0 25.3 9.7 3.4 7.7 24.4 25.8 22.4 6.1 51.9 9.1 26.1 6.3 26.3 26.0 57.0 29.5 3.3 26.4 32.7 6.5 19.7 12.7 24.9 27.3 9.7 7.9 6.9 14.8 10.2 4.8 27.3 26.5 14.5 5.0 9.6 17.5 54.5 13.1 Tax Content 26.9 14.1 6.4 24.0 54.4 26.4 21.7 15.4 4.2 7.4 51.2 20.9 29.2 14.2 20.1 source: Natural Resources Canada MJ ERVIN & ASSOCIATES 87 .2 27.2 26.5 25.2 11.RUL Canada Avg Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Jan-96 Feb-96 Mar-96 Apr-96 May-96 Jun-96 Pump ex-tax Rack Crude Price Pump 10 city Avg Edmonton 26.2 5.8 20.8 28.2 9.0 11.7 25.7 23.8 52.9 27.0 28.3 8.9 4.9 12.1 61.1 26.1 55.1 14.4 13.4 26.0 26.2 4.5 4.5 21.6 5.6 10.3 26.6 4.3 4.9 17.1 15.5 28.1 24.7 29.7 3.0 27.9 58.0 5.0 5.0 14.6 12.4 6.5 20.0 12.0 28.2 25.2 26.1 51.7 26.0 6.5 2.9 28.0 9.6 53.2 25.5 11.0 25.4 28.5 7.9 3.5 3.4 6.6 21.7 51.0 52.3 26.6 19.1 21.8 17.9 49.7 8.1 Gross Refiner Margin 7.9 12.8 29.3 21.7 25.1 16.7 52.3 26.1 15.0 28.3 26.5 17.1 11.9 11.5 6.5 13.8 25.0 14.7 16.3 6.4 11.9 5.3 4.6 53.7 53.5 19.1 11.3 27.2 7.2 15.2 7.6 15.

322 2.613 3.773.321.475 2.564 2.450 2.1 23.039.558.366 2.7 24.682 3.037 2.637 3.781.220.011 2.202 3.202.8 30.461 3.378.045 2.122.9 30.268 2.409.022.020 2.837.2 24.743 2.326.047 2.544 3.651 2.206.8 27.716.095.457 2.130 3.4 24.379.108.3 24.297 2.044 2.897 2.7 29.9 26.818.8 22.333.429 2.796.995.235 3.311 3.1 16.176 2.878 2.979 2.779 2.245.636.263.8 29.646 2.412 2.930 3.604 2.3 Canada Avg RUL Rack Price (¢/l) 35.661 Canada Avg ex tax RUL pump price (¢/l) 39.2 27.600.968 3.416 2.8 MJ ERVIN & ASSOCIATES 88 .869 2.744.325 2.377.443 2.672.130 3.430.1 23.5 32.498.201.808.752 2.089.7 28.9 19.4 31.859 2.180 2.439.580 3.572 2.114 3.015 3.748.298 2.958.934.1 23.095 2.191 2.710.132.4 22.8 23.140.508.801.884 2.644 3.218 3.889 3.113.642.047 3.476.329 3.102.799.403 2.026 2.709 2.609.313 2.490 3.369 2.3 22.843.246 2.7 21.831.075.456 2.415 2.141.323 3.6 23.4 21.9 21.281 2.853 3.120.932 2.970 3.441.628 3.142.622.9 23.904.703 2.345.893.804 2.8 28.085.785.966.381 2.830.301.081.709 2.865.2 26.7 31.462.262.669.477.030.025.218. Demand.291.286.209.4 24.979 3.883.361.112 2.251.346.8 26.967 2.813 2.873.871 2.5 31.437.458.684 2.479 2.000 3.2 26.299 2.599 2.9 17.5 19.354.301.5 25.073 2.5 27.287 2.389.3 22.876.897.9 23.281.083.6 26.801.067.254.029 2.335 2.4 25.193 3.2 23.941 2.970.864 2.641.802 2.2 23.729.469 4.5 22.254 2.636.141.587.8 33.633.775.316.7 18.833 2.056 3.373.0 20. and Pump/Rack Prices Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Jan-91 Feb-91 Mar-91 Apr-91 May-91 Jun-91 Jul-91 Aug-91 Sep-91 Oct-91 Nov-91 Dec-91 Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 2.931 3.045 2.2 29.732.5 23.970.6 28.502 2.9 31.720 3.176 3.973.287 2.181.626.887.7 29.141 3.045.182 3.180.299.733 2.168 2.3 23.027 2.9 22.070.823.5 27.5 30.7 26.429 2.938.7 24.739.840.003.998.2 22.827 3.930.070 3.558.4 21.647.1 29.677 3.2 27.671.369.532.279 2.370 2.518.900.682.269 2.0 28.294.179 3.735.035 2.455.101.473.841 2.894.097 2.Table C: Canadian Supply.7 29.160 3.748 2.666.798.620 3.960.2 27.765 3.122 2.4 29.1 22.874 3.3 26.242 2.019.232 3.804 3.002.844.485 2.9 26.619 2.880 Canadian Retail Gasoline Sales (M3) 2.688.300.8 23.437.627 2.501.6 21.589 3.0 24.256 2.969 2.565.270 3.516.499 2.101 2.193 3.839 2.161.6 24.192.714. Inventory.521 2.853.9 23.625 2.725.667 2.051 3.295.621.338 3.592 2.952.661 Canadian Domestic Gasoline Sales (M3) 2.4 32.767.615 2.287.810.331 2.422.9 29.411.853 2.427.897 3.254.566.301 2.782 3.151.693 3.188 3.822.480.633 2.324 2.510 3.890.180 3.315 2.935 3.164.2 21.976.673 2.131.687.285 2.199 2.2 27.1 21.250.771 3.933 3.767.8 21.322 2.886 3.322 3.152 2.654.5 28.3 23.255 3.612 3.7 34.2 20.630.283.509 3.133 3.

179.638 2.7 22.130 3.601 3.660 3.8 28.566 3.317 2.097.214 2.222 2.198.390.155 2.005 2.205 2.679.4 20.338 2.796.7 19.717.182.006 3.204.997 2.825.294 3.370.324.840 2.940 2.467 2.617 2.315.984 3.264 2.148.055 2.930.0 26.048.195.614.382.184.799 2.442 2.889.928 3.469.346 2.669 2.170 Canadian Retail Gasoline Sales (M3) 2.198.480 2.336.671.539.830 3.675 2.656 3.386 3.555. inventory) / Natural Resources Canada (price) MJ ERVIN & ASSOCIATES 89 .797.037 3.658.9 29.649.9 22.068.9 27.141 2.170 3.415 2.906.483.961.149.785.Net Canadian Closing Supply: Gasoline Canada Production (M3) Inventory (M3) Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 3.8 21.244 3.1 21.250.077.521 2.376.082.649.936 3.667 Canadian Domestic Gasoline Sales (M3) 3.648 3.703 3.5 21. demand.7 21.1 24.994 3.871 3.264 2.6 20.620.977.320 3.714 2.919 2.6 20.8 25.881.864 2.516 3.692.112 3.324 2.597 2.414 3.4 26.644 3.8 20.806.0 25.607.5 source: Statistics Canada (production.965.0 26.261.999 3.344 3.426.0 25.8 24.2 25.753 3.986.505 2.123.165.0 24.219 Canada Avg ex tax RUL pump price (¢/l) 27.074.4 25.363.606.2 25.791 3.537.904.198 2.519.863.5 21.593.857.2 26.5 25.7 Canada Avg RUL Rack Price (¢/l) 20.386 3.970.773.4 26.

0 Sioux Lookout 62.0 46.9 52.4 55.7 52.5 51.9 53.5 56.9 58.1 50.7 54.4 50.9 61.3 48.9 54.9 50.9 61.8 54.5 57.9 49.8 52.9 56.4 56.5 57.4 53.3 55.7 65.0 52.0 50.8 49.9 64.4 54.8 52.9 52.8 57.2 62.3 62.9 48.9 53.6 46.5 59.4 54.2 51.5 45.5 Vancouver 53.0 54.9 56.9 52.9 51.9 53.2 48.7 54.0 61.9 56.5 58.8 51.0 44.4 52.8 Thompson 59.5 60.6 46.4 56.0 48.1 44.0 52.2 57.8 59.5 57.4 61.7 54.7 50.1 56.3 50.7 65.3 51.3 56.1 55.5 59.6 55.1 50.7 65.5 47.7 65.6 54.2 62.5 47.5 54.3 52.6 49.5 56.7 53.4 52.5 53.2 50.4 55.0 62.9 58.0 61.9 52.8 47.4 61.9 63.6 53.6 62.7 62.5 57.4 59.2 62.5 59.9 54.5 55.8 53.1 53.5 58.4 63.5 57.9 56.6 47.2 62.2 46.9 MJ ERVIN & ASSOCIATES 90 .0 61.8 56.2 54.4 46.8 57.9 64.9 64.6 58.9 53.6 56.9 58.0 61.5 60.4 57.8 56.9 53.5 58.4 46.5 50.4 56.0 61.4 55.5 57.9 54.9 51.7 53.7 57.4 54.7 50.3 55.9 51.7 52.7 51.9 44.6 48.4 56.5 58.9 58.4 57.9 47.4 56.5 58.3 52.5 51.5 54.1 55.5 51.4 53.2 56.3 54.9 53.5 62.9 56.5 53.5 57.0 61.2 47.5 59.9 45.3 42.0 57.7 45.7 White Rock Calgary 45.2 46.9 49.9 53.4 46.3 52.6 58.5 60.2 62.8 48.4 61.2 65.9 56.7 62.9 54.6 48.2 62.9 49.0 39.9 61.4 49.9 52.6 52.2 Nanton Peace River Regina 49.0 59.2 55.1 49.9 51.5 59.5 51.9 64.2 65.4 65.7 46.5 58.8 48.2 46.0 61.Study Markets RUL Pump Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Victoria 54.9 56.2 63.4 55.8 47.1 60.2 51.6 48.5 49.9 61.1 49.5 57.8 50.3 52.6 54.8 50.8 59.9 64.5 58.9 53.8 56.7 51.9 56.4 58.2 54.9 52.1 53.3 50.9 46.0 55.5 57.5 61.5 55.7 44.7 51.5 57.1 43.8 48.2 61.5 58.2 62.5 60.7 65.9 57.6 50.1 41.9 62.8 52.0 62.9 57.5 59.3 48.1 44.4 56.8 64.9 62.1 52.7 48.9 56.5 47.9 47.8 41.2 50.8 44.Table D: Pump Price History .9 53.9 53.0 58.5 58.9 56.9 55.7 45.9 47.8 56.5 59.6 53.5 57.4 52.2 59.8 53.5 51.5 59.3 49.1 55.8 53.7 49.7 57.9 54.6 47.5 52.2 50.6 50.5 57.9 55.5 46.5 53.3 52.3 59.8 48.8 45.8 56.0 62.9 56.5 58.1 59.9 54.5 57.9 54.9 58.7 53.5 58.6 55.4 47.6 59.9 54.9 59.7 48.2 62.8 52.2 62.9 55.1 52.3 61.2 43.4 58.5 59.9 52.5 56.4 Winnipeg 49.8 53.5 58.9 44.2 51.2 54.2 58.9 47.0 59.4 53.5 60.9 53.3 49.5 52.4 55.3 54.9 55.4 52.8 55.5 61.6 47.5 60.5 56.1 49.5 56.5 45.9 61.4 48.7 63.9 59.4 55.4 52.6 51.8 56.6 44.8 52.9 61.

1 54.7 55.6 55.9 55.6 52.4 57.2 57.5 52.2 56.2 56.1 48.0 60.5 52.8 56.9 56.5 51.5 57.0 61.6 52.5 54.9 56.7 46.6 58.1 55.1 56.6 63.4 54.0 52.1 49.6 51.7 53.6 52.1 54.6 54.6 56.9 57.5 57.5 61.5 57.8 57.2 56.8 57.7 57.3 62.5 67.3 59.4 58.7 60.2 57.8 53.3 54.9 55.7 59.6 54.9 61.4 50.5 56.1 60.6 59.0 55.4 54.3 55.8 53.5 63.4 51.0 48.3 52.8 60.5 63.7 48.2 53.0 55.0 53.5 52.2 52.0 57.0 60.0 51.9 55.1 Toronto 52.8 55.0 52.8 55.2 56.9 61.3 61.6 52.4 55.9 55.4 57.1 58.3 57.5 61.Table D: Pump Price History .0 57.5 54.6 50.3 53.4 51.6 59.9 55.6 51.1 58.0 50.0 52.9 61.3 56.4 54.1 51.2 55.2 56.2 56.6 61.2 54.9 56.9 57.8 60.2 61.2 57.6 55.4 53.3 49.0 56.6 63.0 47.3 54.3 53.4 60.1 53.8 49.3 52.2 56.7 50.7 56.Study Markets (cont’d) RUL Pump SS Marie Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 52.9 58.8 49.2 55.2 60.8 57.4 51.0 49.9 62.8 53.3 51.2 52.3 59.5 54.9 55.6 53.8 51.8 54.6 55.7 52.1 57.8 55.3 53.6 53.7 58.2 57.8 56.9 53.8 50.7 57.7 57.8 54.2 57.3 59.5 60.1 55.4 58.1 61.7 48.2 57.1 55.2 56.8 61.5 53.6 56.4 54.6 54.8 55.5 51.2 61.0 53.0 54.0 47.9 64.0 59.2 55.0 54.3 56.2 61.1 55.6 61.6 55.5 54.2 54.9 57.2 58.8 54.0 52.9 53.9 49.2 57.1 54.8 Halifax Charlottetown 60.3 54.6 55.4 58.4 54.7 56.6 49.9 54.0 60.6 52.6 54.3 52.0 51.1 59.9 49.9 50.1 52.2 54.7 58.8 54.8 63.6 55.9 56.3 59.3 55.2 55.9 55.6 53.5 60.2 60.9 60.4 52.0 57.3 58.1 59.1 58.9 55.0 55.2 50.7 52.1 54.2 53.4 45.7 54.9 54.2 49.0 60.7 53.4 53.6 57.9 54.5 56.1 61.5 59.9 49.5 64.5 63.3 49.1 52.7 56.1 57.6 59.2 55.3 56.7 59.7 57.6 53.9 60.0 55.7 54.1 53.6 58.1 58.5 56.2 49.5 55.7 56.7 54.1 56.1 51.0 52.1 61.3 55.5 64.4 57.9 57.3 53.4 54.2 49.2 52.2 51.8 52.1 55.6 60.5 MJ ERVIN & ASSOCIATES 91 .0 59.1 53.3 54.2 53.0 55.1 55.0 55.5 51.7 51.4 58.6 63.3 54.5 59.5 53.0 59.3 56.7 54.6 56.9 55.2 54.4 58.6 52.8 50.3 55.8 55.2 55.5 55.7 51.7 44.5 54.1 54.6 55.2 51.6 54.4 58.1 56.7 54.7 47.0 53.2 59.2 57.5 52.9 61.7 64.0 57.5 54.8 55.8 59.5 56.3 55.0 54.2 57.9 58.4 57.3 52.9 63.2 59.5 57.0 50.0 48.8 47.5 58.2 54.1 53.7 56.6 50.6 58.6 54.0 52.8 55.3 55.8 52.6 56.5 56.1 51.3 54.0 61.0 54.2 49.2 51.1 57.1 53.8 50.4 55.5 57.6 51.1 54.2 58.0 50.3 60.9 64.1 52.0 58.4 54.6 52.5 54.7 51.6 Canada Avg 55.2 Chicoutimi Gaspé Saint John 60.2 57.5 Ottawa 58.3 54.5 53.4 57.7 54.3 54.9 60.5 53.5 48.9 52.5 51.4 53.4 53.4 57.6 54.0 56.6 50.5 59.0 56.7 57.9 64.7 56.7 51.5 61.3 53.9 53.9 53.3 56.6 49.9 55.9 49.4 49.4 54.9 51.9 61.5 55.7 52.6 58.6 58.7 49.1 60.8 61.2 58.4 52.8 55.9 53.3 54.2 Montreal 63.

4 20.1 27.1 30.4 31.3 24.4 21.8 26.6 Sep-93 28.3 29.9 27.1 27.5 24.7 26.0 24.6 27.8 22.0 22.6 30.7 26.6 23.8 Feb-94 24.6 24.9 28.1 28.2 Nov-92 31.9 30.0 31.6 Aug-95 30.3 Jul-92 31.8 21.6 26.4 23.0 May-93 29.0 24.3 28.8 27.5 Jul-94 29.7 29.0 29.9 24.1 25.9 27.4 25.0 25.5 24.8 26.3 Dec-95 Edmonton Regina extax extax 27.9 25.9 21.1 26.3 30.5 27.9 Aug-93 30.9 25.6 21.0 26.9 25.5 26.3 29.5 29.4 31.5 29.7 30.2 32.8 24.2 Nov-94 29.2 Jun-94 31.6 25.3 27.9 26.7 28.8 29.9 23.4 20.1 31.2 24.4 22.9 23.1 25.1 Apr-94 29.1 24.0 21.5 21.8 27.2 28.0 28.1 Mar-95 29.9 25.9 28.4 27.3 29.0 32.6 29.5 28.7 26.4 Jun-95 30.7 Winnipeg extax 27.1 19.2 23.9 26.3 29.4 Mar-92 28.2 28.1 22.3 30.4 25.5 Sep-92 29.0 23.1 26.1 22.6 26.4 23.5 25.7 28.4 29.7 28.0 25.6 23.4 27.4 31.4 25.0 Jun-93 26.5 27.9 24.8 25.4 25.2 Dec-94 26.3 May-94 28.9 29.3 27.4 31.5 27.6 26.5 23.8 27.6 26.3 23.4 29.8 26.4 30.7 29.2 25.6 28.5 24.6 25.8 24.9 28.3 24.8 Jan-94 25.2 Apr-93 28.6 30.5 26.4 29.0 25.6 23.7 27.8 29.9 28.9 20.2 27.3 Feb-95 26.4 30.5 27.4 30.7 28.9 24.6 May-95 29.4 Dec-92 31.8 29.7 27.6 24.8 24.0 23.7 30.2 25.3 28.1 Feb-93 29.2 26.2 28.7 30.3 26.1 23.7 30.7 29.5 29.0 23.4 31.7 29.1 24.3 29.7 Sep-94 32.7 31.6 30.6 29.2 29.7 Mar-94 28.8 24.3 32.4 29.8 26.8 29.3 28.8 Dec-93 26.9 29.7 28.4 24.6 27.7 25.4 28.2 29.3 26.3 29.2 24.8 28.4 29.5 29.9 29.3 Jan-93 30.6 29.9 24.0 23.0 31.3 23.5 21.9 21.7 Sep-95 30.9 27.5 29.9 31.9 Jul-93 28.7 24.0 26.0 Apr-92 30.8 25.4 20.6 28.3 29.0 Oct-93 28.2 26.6 27.2 24.7 Jan-92 31.7 Jan-95 27.3 30.4 24.8 31.3 33.5 23.1 25.4 27.8 Toronto extax 26.0 26.9 27.0 27.0 27.6 Mar-93 28.5 Nov-95 30.1 Apr-95 30.4 30.0 23.7 30.3 30.6 27.6 26.7 26.8 23.4 25.9 Oct-94 32.9 24.4 27.6 29.4 28.5 Feb-92 28.9 25.3 26.2 Nov-93 27.2 26.7 28.0 May-92 28.9 26.4 31.9 30.1 30.6 Jun-92 32.4 31.8 27.6 26.4 28.4 27.5 Oct-92 30.5 27.1 28.8 25.3 24.8 28.6 26.Table E: Ex-tax Pump Price History .1 25.4 MJ ERVIN & ASSOCIATES 92 .3 26.4 29.4 22.1 31.0 24.3 29.3 28.4 29.3 29.3 21.2 26.5 Jul-95 30.2 24.1 20.2 28.1 24.3 29.7 24.6 26.5 Aug-94 28.3 28.4 26.9 26.5 Oct-95 30.6 22.3 31.2 22.6 22.8 27.2 27.Study Markets RUL Extax Victoria extax Vancouver ex Calgary extax tax 32.4 23.9 30.4 22.3 26.8 27.8 28.7 Aug-92 24.6 23.

8 36.6 26.9 28.2 36.7 24.2 24.0 33.4 25.1 34.3 31.7 32.4 36.2 32.3 25.1 23.0 30.3 24.2 29.3 34.6 24.7 22.5 25.0 28.3 25.7 24.9 29.8 25.6 27.9 29.1 32.7 26.3 33.0 33.5 25.4 25.1 24.6 26.3 26.0 26.1 30.6 23.9 32.0 28.0 25.5 25.4 33.2 22.2 27.3 30.9 27.2 27.7 32.7 23.8 28.4 26.6 26.2 26.6 28.1 29.9 31.6 32.0 25.1 30.1 22.9 24.7 26.8 32.7 24.8 23.4 26.7 24.9 29.3 31.4 25.8 23.3 31.8 26.9 32.8 23.4 26.5 31.0 26.8 27.2 27.8 29.9 37.4 31.4 31.5 28.9 33.9 35.7 23.3 28.8 28.4 33.2 30.8 32.5 27.8 30.9 30.9 26.2 28.7 28.0 28.5 24.5 25.4 24.7 24.3 27.2 30.8 25.4 36.1 28.2 23.9 30.2 33.3 29.6 32.4 25.8 Canada Avg extax 29.6 36.5 32.8 30.8 26.5 30.0 29.3 34.4 33.4 24.0 34.2 34.6 33.5 31.1 24.3 23.7 33.8 28.1 25.9 27.4 27.2 27.3 34.4 33.0 36.3 26.8 26.3 28.6 29.3 29.1 29.6 36.1 32.7 30.9 29.4 21.1 28.2 25.5 28.8 24.7 27.0 32.2 27.7 26.2 28.8 29.5 36.5 26.2 32.3 26.9 26.7 28.0 27.0 34.6 32.3 29.Table E: Ex-tax Pump Price History .9 27.2 22.8 25.0 34.2 33.7 27.0 23.5 28.3 29.7 26.2 22.8 23.7 MJ ERVIN & ASSOCIATES 93 .4 28.2 27.7 34.2 25.6 23.3 25.6 27.6 28.1 32.2 26.2 26.8 27.3 25.6 Charlottetown extax 36.1 26.0 28.7 32.8 26.6 32.6 22.2 27.4 31.0 29.6 31.8 29.9 30.7 28.9 23.2 27.8 27.7 26.9 29.9 27.0 33.0 30.5 34.5 28.5 27.5 26.9 33.1 34.9 28.2 26.7 27.4 32.4 32.1 31.6 31.3 28.3 28.7 29.9 26.8 32.1 24.6 32.3 35.4 33.0 26.5 33.6 28.1 30.5 27.5 25.9 29.7 23.6 34.8 29.1 29.1 Montreal extax 31.8 28.9 31.1 32.5 24.6 29.2 22.8 25.9 32.0 33.8 26.0 25.9 30.0 36.Study Markets (cont’d) RUL extax Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Ottawa extax 31.2 21.7 28.3 27.6 27.8 27.1 34.8 32.5 25.7 30.5 27.0 23.8 30.8 33.3 31.9 27.2 25.5 33.2 28.3 22.2 Saint John Halifax extax extax 34.6 28.4 32.4 34.0 32.7 28.1 26.3 31.9 29.8 33.2 32.6 25.2 26.7 26.6 28.7 25.0 33.1 24.5 30.4 28.0 29.8 29.7 Quebec extax 32.7 29.0 28.5 29.4 22.5 30.2 25.5 33.9 32.2 36.3 29.0 31.8 28.6 25.9 30.2 30.8 28.2 27.7 34.2 24.3 28.7 27.6 34.6 26.6 33.

0 19.1 23.4 22.9 22.6 19.5 19.6 20.5 24.7 22.3 21.2 19.1 20.3 23.8 20.6 21.1 21.7 21.5 22.3 17.9 19.3 19.4 21.4 21.2 20.9 18.5 22.8 18.8 20.8 23.5 20.0 21.9 21.6 25.7 16.0 21.4 21.1 23.3 19.4 20.1 21.2 20.2 16.2 22.0 22.0 21.9 21.3 17.1 23.0 22.9 23.4 23.3 20.3 20.Study Markets RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Saint John NB rack 21.7 22.0 21.7 22.0 21.5 23.4 22.4 22.4 22.2 21.1 21.7 20.0 23.0 23.4 21.5 21.1 20.8 22.3 18.Table F: Rack Prices .9 25.7 22.7 22.2 18.3 23.7 19.5 21.7 21.2 18.0 20.1 22.3 21.4 22.3 24.5 22.8 19.1 22.3 22.7 18.4 22.5 22.8 24.9 18.5 23.9 18.3 22.6 23.4 23.6 23.9 22.0 21.3 21.8 19.2 17.5 27.2 23.0 22.4 22.2 22.7 18.5 23.6 23.2 18.1 19.3 23.8 23.2 19.4 17.4 20.7 21.4 20.5 19.9 23.1 20.9 22.6 21.5 21.8 22.1 22.1 20.8 Ottawa rack Thunder Bay rack 20.0 23.4 20.1 22.8 21.4 21.0 23.9 21.0 20.2 21.2 Quebec city Montreal rack Toronto rack rack 19.6 20.3 24.5 17.7 21.9 22.1 22.8 27.8 21.2 20.7 21.1 19.4 22.4 21.0 22.0 23.4 21.8 21.2 20.4 23.3 23.3 26.9 22.5 17.5 17.7 17.8 25.8 23.6 19.7 23.8 20.2 21.2 18.6 20.1 15.3 18.2 21.8 21.3 20.9 20.3 23.6 19.9 21.5 18.6 23.3 18.0 23.8 23.6 19.5 22.2 19.7 22.5 21.3 17.6 20.8 20.8 20.7 19.4 19.0 19.2 23.5 20.4 20.1 24.7 20.4 21.8 23.7 21.5 21.8 18.7 22.1 21.3 21.4 21.3 23.1 20.0 24.7 23.8 20.7 17.2 20.4 22.3 23.8 18.8 22.3 20.3 22.0 23.2 21.4 21.4 23.1 22.1 19.6 20.6 19.4 18.2 29.3 21.1 20.6 25.2 16.9 17.1 Halifax rack 20.0 23.9 21.4 22.8 21.6 25.9 20.2 18.8 23.6 18.7 22.4 21.1 21.5 22.1 20.1 21.5 20.1 22.6 22.9 22.4 21.6 20.5 26.7 21.7 20.5 21.2 20.1 18.2 21.6 23.9 20.0 19.7 MJ ERVIN & ASSOCIATES 94 .5 21.7 22.6 23.8 19.2 22.8 23.2 16.6 19.3 19.8 19.5 21.4 15.5 20.4 21.8 22.5 18.4 22.2 21.1 16.3 19.1 15.0 21.1 21.2 23.0 22.4 24.8 21.0 22.2 21.1 20.8 18.5 24.5 24.7 17.3 22.9 24.9 22.1 21.6 20.9 18.9 21.8 22.2 23.

6 22.4 22.6 23.6 22.6 23.6 21.2 19.1 24.6 21.7 25.4 21.5 21.5 20.2 22.0 23.5 21.6 20.4 24.0 20.3 24.9 22.8 22.6 19.8 20.5 22.2 Edmonton Rack 23.5 21.3 18.6 25.3 21.2 24.2 20.7 23.9 21.0 22.2 22.7 17.9 19.8 Vancouver Victoria rack rack 24.2 18.7 21.4 22.7 21.6 23.9 22.8 23.5 24.7 21.6 23.4 20.9 21.4 19.9 20.5 24.8 18.2 23.9 20.5 23.6 21.1 22.4 22.9 23.6 17.6 20.1 23.4 24.9 22.8 22.4 21.1 23.7 22.7 21.5 24.3 17.6 22.0 22.9 19.3 19.4 21.3 24.8 21.1 22.9 18.1 21.3 22.7 21.7 18.4 23.8 23.1 22.7 22.5 19.4 18.8 24.7 22.8 21.0 21.9 21.5 21.3 23.7 21.6 23.0 17.9 21.7 22.5 22.0 24.0 20.8 20.9 22.7 21.1 23.4 24.1 21.8 21.6 21.3 20.3 22.2 21.0 22.2 20.9 18.1 23.3 20.5 19.7 24.9 21.2 21.1 21.5 23.7 23.1 23.9 19.4 21.5 21.1 16.0 20.9 22.6 20.1 25.8 23.7 19.9 24.8 20.1 23.5 23.1 18.1 25.5 18.2 24.5 23.7 22.Study Markets (cont’d) RUL Rack Jan-92 Feb-92 Mar-92 Apr-92 May-92 Jun-92 Jul-92 Aug-92 Sep-92 Oct-92 Nov-92 Dec-92 Jan-93 Feb-93 Mar-93 Apr-93 May-93 Jun-93 Jul-93 Aug-93 Sep-93 Oct-93 Nov-93 Dec-93 Jan-94 Feb-94 Mar-94 Apr-94 May-94 Jun-94 Jul-94 Aug-94 Sep-94 Oct-94 Nov-94 Dec-94 Jan-95 Feb-95 Mar-95 Apr-95 May-95 Jun-95 Jul-95 Aug-95 Sep-95 Oct-95 Nov-95 Dec-95 Winnipeg Regina rack Calgary rack rack 24.5 22.6 23.7 22.9 22.9 23.1 23.2 23.1 22.6 21.1 21.4 23.2 20.8 22.5 21.7 22.9 22.3 17.2 21.3 23.3 23.5 19.9 23.5 24.2 23.3 23.4 21.8 24.7 20.1 25.8 23.5 17.6 17.9 19.5 23.9 22.5 18.0 22.4 23.9 19.4 21.2 24.3 21.1 22.5 23.4 23.2 20.3 21.6 24.1 19.6 21.1 23.9 21.7 21.2 24.5 MJ ERVIN & ASSOCIATES 95 .3 22.1 21.9 19.7 22.6 21.1 17.5 Canada avg rack 22.3 23.0 18.8 20.0 22.5 22.7 21.4 19.1 23.2 22.9 19.7 22.0 25.2 21.9 23.4 21.3 24.5 19.0 20.6 21.9 21.3 19.7 24.5 21.8 24.1 20.0 21.6 23.1 21.2 21.3 23.8 22.0 21.6 23.6 19.7 23.1 21.1 23.2 24.Table F: Rack Prices .3 20.7 22.9 21.2 19.1 21.8 21.3 24.6 21.3 21.0 22.3 17.6 22.0 22.7 21.6 21.2 22.8 22.0 24.1 20.4 25.0 23.9 23.6 24.5 23.0 24.9 24.2 22.0 24.9 17.5 20.7 24.1 20.1 22.7 23.9 23.9 21.0 21.8 19.6 20.5 20.5 21.5 22.9 20.0 22.4 24.2 23.4 21.0 23.8 20.3 23.4 22.7 21.7 21.4 22.0 17.0 23.7 25.3 22.0 18.2 22.5 22.2 23.9 24.2 22.9 22.5 21.1 16.5 21.0 21.6 25.3 20.2 20.4 20.0 23.2 22.7 23.1 19.8 25.5 20.8 22.2 23.6 25.1 18.7 17.

250 748.770 2.45 63.712 1.192 2.94 55.45 53.702 333.85 54.40 61.03 58.30 54.234 799.810.377 30.858.935 758.16 59.972 429.687 1.400 142.30 63.10 53.60 49.018.32 51.268 478.749 243.933 25.20 58.11 58.72 58.10 52.241 451.790 185.483 63.18 51.985 636.000 1.Table G: Study Market Data .922 103.332 101.60 60.834 71.334.101 447.980 120.894 1.628 702.508 2.89 65.53 61.173 568.621 102.38 56.194.23 53.70 55.093.23 63.850 126.174.549 111.00 57.83 68.26 44.030.529 123.93 63.80 64.50 55.625 64.460 833.745.704.412 722.73 65.60 70.475 1.669 203.370 41.89 60.614 3.000 1.88 64.500 378.014 3.30 52.643 184.86 56.78 67.07 61.702.698 Note: Regional.00 66.811 120.245 351.949 1.92 51.832 91.00 67.554 2.678.30 66.35 73.25 57.897 350.018 2. MJ ERVIN & ASSOCIATES 96 .597 2.997 397.53 48.749 91.543 2.060.24 61.50 56.50 56.88 54.636.48 56.145.298 576.98 59.102 98.19 49.20 59.42 53.40 54.70 49.516.97 51.17 Diesel 64.40 63.20 54.10 63.119 632.34 63.557.238 2.000 63.74 57.30 68.905 183.97 63.945.22 59.686 273.40 59.796 529.19 52.150 48.830 2.983 1.90 63.85 48.00 48.00 57.300 578.214 248.30 57. and All Study Markets are weighted (by market population) averages.166 102.26 49.000 217.890 2.28 65.196 669. Urban.837 329.296 179.513 19.72 63.859 240.483 2.90 67.72 74.448.30 54.420.10 59.89 61.438 591.903 33.87 61.120 570.00 62.204.60 50.40 58.26 63.20 60.052 84.009 54.13 58.141.220 389.246 2.414 450.895 600.Throughput and Price by Grade 1995 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Average Throughput (Litres) Premium Midgrade Regular 661.66 50.056.153 316.36 54.796 2.55 58.671 399.65 54.971 473.249.101 256.620.90 62.113 2.327 Average Pump Price (¢/litre) Premium Midgrade Regular Diesel 63.02 51.058 2.20 61.211 15.

25 31.59 22.97 23.45 20.03 20.Rack Price.38 24.45 24.39 Note: Regional.82 21.83 25.59 24.25 27.15 24.45 24.27 20.31 22.01 22.64 28.96 22.33 22.76 24.02 23. and All Study Markets are weighted (by market population) averages.88 28.93 23.73 32.42 25.57 22.07 26.08 23.81 25.23 24.45 23.63 28.07 24.45 22.Table H: Study Market Data .26 27.39 21.55 28.49 25.50 25.69 23.45 25.16 21.75 22.17 20.59 28.32 21.58 25.23 25.47 20.37 27.34 20.07 24.88 22.74 21.93 27.16 29.09 24.45 20.88 28.85 28.92 30.01 28.48 25.07 24.98 25.41 22.65 26.84 28.43 28.28 22.23 26.95 25. Tax (by Grade) Rack Pt.49 31.36 24.13 23.50 20.34 25.83 23.33 22.08 25.39 22.40 27.45 29.63 24.63 21.55 28.07 26.49 21.65 27.42 24.27 29.89 29.21 27.34 26.59 22.63 25.38 24.90 26.51 25.30 29.97 22.65 21.18 25.03 21.45 20.43 20.94 23.95 Premium 26.53 23.96 24.04 26.81 27.63 26.63 20.54 28.39 22.83 22.41 27.83 24.21 27.25 28.40 25.59 28.69 27.88 20.16 22.81 28.20 20.20 27.98 28.28 23.83 24.89 28.49 21.92 21.93 23.18 28.99 26.42 27.06 28.51 20.81 21.57 29.33 27.15 29.89 26.43 21.73 26.51 31.59 28.33 21.99 28.90 27.42 24.15 20. Urban.96 24.11 26.51 25.92 20.88 22.35 25.91 21.45 20.88 20.33 21. Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts Victoria Vancouver Vancouver Calgary Regina Winnipeg Calgary Edmonton Winnipeg Toronto Ottawa Toronto Winnipeg Montreal Quebec Montreal Saint John Halifax Halifax 1995 Average Rack Price (¢/litre) Premium Midgrade Regular Diesel 26.23 23.15 27.76 25.03 24.47 27.95 22.33 21.56 22.87 26.04 24.45 28.43 20.97 25. MJ ERVIN & ASSOCIATES 97 .39 21.75 27.36 26.92 22.68 Diesel 36.32 33.33 21.25 24.89 25.95 22.78 Product taxes Midgrade Regular 26.09 27.82 28.83 24.45 29.33 22.47 28.26 28.33 21.43 21.84 28.

73 10.94 Note: Regional.31 23.04 22.26 5. Average Deviation is the average deviation of the market values from their mean (average) value. Variance uses the formula [n∑x2 .88 31.00 58.73 2.32 31.17 1.28 1.70 22.07 30.14 60.85 11.19 5.80 9.22 14.21 8.98 0.25 1.03 28.38 28.58 66.38 0.38 22.033 0.02 3.92 22.08 55.22 5.37 26.18 21.29 24.71 33.93 56.26 27.02 0.01 31.63 60.49 2.Blended Prices.83 12.84 5.33 .64 2.35 27.82 95 Retail Gross Product Margin 6.02 22.93 22.05 6.08 0.47 58.53 22.53 6.16 3.11 26.24 7.15 66.68 7.44 33.91 22.98 1.62 56.77 30.43 0.41 12.45 1.82 3.06 28.35 60.77 37.75 23.95 21.84 28.90 23.22 1.27 11.39 56.56 24.27 62.00 22.66 28.91 29.83 27.20 14.36 20.89 0.31 34.45 6.08 17.79 0.83 21.53 21.35 58.73 22.34 1.44 25.16 20.48 7.28 27.12 23.91 2.85 24.42 2.12 6.64 3.88 5.34 0.52 5.31 0.58 1.86 49.04 0.23 38.50 10.38 2.24 7. MJ ERVIN & ASSOCIATES 98 .60 7.59 4.91 0.57 12.23 7.90 59.29 8.75 28.47 0.13 11.78 2.35 28.18 7.85 26.24 23.80 1.77 5.50 0.97 0.13 0.98 31.41 29.11 31.31 28.27 60. and All Study Markets are weighted (by market population) averages.50 3.Table J: Study Market Data .21 24.56 4.04 28.28 1.08 3.18 55.89 28.99 0.38 7.43 23.64 1.41 7.33 9.02 13.44 56.96 27.14 7.96 3.79 33.13 28.94 22.01 0.20 5.17 11.85 21.21 8.30 5.54 50.00 0.26 3.68 7.07 0.36 0.52 30.30 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Variance Avg Deviation Group B Variance Avg Deviation All Study Mkts Variance Avg Deviation 57.29 7.96 28.95 6.82 32.10 3.28 56.17 9.63 58.10 6.64 3.86 28.16 54.17 26.(∑x)2 ]/n2.30 12. Costs.00 4.06 0. Urban. Margin Cents per Litre 95 Blended Pump Price 95 Blended tax 95 Blended Extax Price 95 Blended Rack Price 95 Retail Freight Cost Gross Marketing Margin 6.06 5.83 1.49 57.60 23.07 0.60 14.83 36.94 17.27 6.99 2.50 58.76 5.68 2.51 11.04 23.72 26.89 21.81 28.81 26.98 0.73 1.03 7.96 25.

102 $ 223.014.143) $ (249.000) $ (241.622 $ 174.658.375) $ (49.604.279 $ 154.794 3.081 $ 222.648 3. and consolidated outlet income these averages are based only on those markets with available data.995 $ 234.750 $ 271.066 3. MJ ERVIN & ASSOCIATES 99 .197.900 2. Urban.367) $ (164. Income Average Outlet Sales (litres) Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown BC/PR ON QU/AT Group A Group B All Study Mkts 3.677 $ 180.550 $ 177. Outlet Costs.289 981.557) $ 102.071. outlet costs.572) $ (286.272 $ 118.098.247 4.023 $ (15.716 Note: Regional.623 2.135 $ 199.966 3. For 95 net retail petroleum revenue.117 $ 207.000 2.766) $ (274.805.630 3.295 $ 174.638 2.394.542.780 $ 85.224 $ 189.157.542 $ 222.Table K: Study Market Data .837 $ 56.332) $ (238.265.000 $ 156.013 $ 227.856 3.244 95 net retail Ancillary Revenue petroleum revenue $ 208.707 $ 260.068 3.866) $ (244.550 694.011.526 $ 207.993 $ 113.694 3.272 $ 210.646) $ (98.010 1.465.640 4.144 2.544 $ 175.632 $ 256.956) $ 200.885.246 $ 118.067 $ 92. these averages are based on all applicable study markets. but for ancillary revenue.089.948 3.209 $ 26.890.095.217 2.746 $ (374.241) $ (227.481 $ 96.502 $ (80) $ 60.719 3.429 $ 238.478 4.800 $ 225.852) $ 119.688 $ 85.779 $ 121.250.208) $ (226.772. and All Study Markets are weighted (by market population) averages.855 $ 278.875 $ 255.520 5.934 3.302 $ 69.058.098 $ (320.467 $ 96.827.900 $ 179.032 $ 77.120 $ 54.510 $ 60.564 $ 252.263 $ 60.911) $ (166.913 $ 139.004.129 $ 97. Revenue.871) $ (128.Sales.074 $ 131.116 Outlet costs 95 Consolidated Retail Outlet Income $ 126.626 $ 81.223.209 $ 82.

145 81.605 16.790 1.80 10 4.76 18 5.775.775 678.890 rank 9 4 5 3 10 8 15 13 16 1 2 6 19 7 12 18 14 11 17 ¢/l 6.54 6 2.827 3.095 3.98 6. 106 446 8 313 86 261 5 8 6 546 209 24 3 866 97 8 56 113 23 rank 8 3 14 4 10 5 18 14 17 2 6 12 19 1 9 14 11 7 13 No.36 5.73 14.85 15 11.870 120.52 13 5.715 14.315 710.88 11 8.03 14 N= 26 37 5 69 30 61 2 4 4 59 39 12 2 74 16 2 17 18 4 Note: Where an * appears after “rank”.42 5 14.40 1 3.97 8.89 7. inverse ranking is used (lowest value = 1).00 11.01 7 2.550 1.058 1.970 330.50 8.30 0.38 0.20 17 14.68 4 7.17 rank* 7 9 9 6 8 11 3 16 17 1 4 12 18 2 15 19 13 5 14 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Gross Product Margin ¢/l rank* 6.975 2.28 17.310 1.604 3.06 1 5.60 11 7.22 3.33 0.48 7 7.41 0.47 14 3.50 9.400 74. of Outlets No.Table L: Study Market Data .22 0. 12 18 4 27 15 17 4 6 5 30 19 10 3 32 14 6 9 9 5 Freight ¢/l 0. of Brands No.180 616.88 12 7.13 2 11.89 2 4.02 0.465 694 3.098 4.223 3.275.08 16 3.53 10 6.27 1.47 7.071 2.658 3.73 5 10.17 19 9.96 5.27 0.Demographic Profiles Population pop’n 299 .394 2.000 pop’n No.06 16 4.04 15 4.265 2.14 rank* 10 9 12 3 1 2 10 16 17 7 6 15 18 7 13 19 4 4 14 rank 9 5 17 3 7 6 17 13 15 2 4 10 19 1 8 13 11 11 15 Est Outlets / 10.50 3 10.23 8 31.30 1.84 12 5.06 5.91 12.475 3.95 3 9.250 981 2.08 4 2.014 5. rank* 3.585 6.60 3.94 18 Victoria Vancouver White Rock Calgary Regina Winnipeg Nanton Peace River Thompson Toronto Ottawa Sault Ste Marie Sioux Lookout Montreal Chicoutimi Gaspé Saint John Halifax Charlottetown Avg Volume per Outlet Marketing Margin 000's litres 3. MJ ERVIN & ASSOCIATES 100 .24 0.98 7.51 9 11.157 2.542.40 9 4.745 16. N refers to study sample size (total = 481).21 0.395 rank 8 3 14 4 9 6 19 17 16 1 5 11 18 2 10 13 12 7 15 No.675 179.23 6 7.91 17 4.845 15.43 12.10 3.089 3.08 3.90 13 4.55 19 11.29 1.79 6.29 8 7.41 1.45 0.45 14.004 3.20 0.

bulk. and provide background resources to industry public affairs managers and the media. accessible through a public fax-back dial-in system. Ervin. and in doing so. Contact: Cindy Christopher. Vice President Public Affairs Address: 275 Slater Street. Contact: Maureen Monaghan Address: 580 Booth Street. They maintain a large database of historical prices at most major centres. Ottawa ON. Senior Advisor.III Sources of Information about the Downstream Petroleum Industry Canadian Petroleum Products Institute (CPPI) The CPPI is a national association of petroleum refining and marketing companies which serves as the voice of the petroleum products industry in Canada on environment. K1A 0E4 Phone: (613) 992-1477 Fax: (613) 992-0614 MJ ERVIN & ASSOCIATES 101 . Contact: Michael J. health. generate jobs and growth. Ottawa ON. 119 .com Natural Resources Canada Natural Resources Canada is a key information resource on the matter of petroleum prices.14th Street NW Calgary AB. They work with major oil companies in benchmarking performance in the retail. MJ Ervin & Associates is a Calgary-based consulting organization specializing in the downstream petroleum industry. Contact: Brendan Hawley. Ottawa ON. safety and business issues. Principal Address: #400. T2N 1Z6 Phone: (403) 283-8704Fax: (403) 283-9104e-mail: mervin@cadvision. cardlock. The SCF is the basis for this study. aviation and lubricants marketing channels. Petroleum Products Address: 235 Queen Street. a series of studies whose goal is to strengthen Canada’s competitiveness. K1A 0H5 Phone (613) 941-6219 Fax: (613) 941-2463 MJ Ervin & Associates / Q1 Solutions Inc. K1P 5H9 Phone (613) 232-3709 Fax: (613) 236-4280 Industry Canada Industry Canada is the primary overseer of the Sector Competitiveness Framework (SCF).

Octane is published quarterly. no 45-004) is a useful source of supply and demand volume data. K1A 0T6 Phone: (613) 951-3562 MJ ERVIN & ASSOCIATES 102 .6th Avenue. 101 .6th Ave. Contact: Gerard O’Connor. It reports industry marketing trends and compiles an annual survey of retail and wholesale outlet representation. Contact: Robert Curran.T2P 3P4 Phone: (403) 266-8700 Fax: (403) 266-6634 Petroleum Communication Foundation (PCF) The PCF is an industry funded. non-advocacy organization whose mandate is to increase public awareness of Canada’s oil industry. Energy Section Address: Statistics Canada. Ottawa ON.Octane Magazine Octane is Canada’s refining and marketing trade journal. Calgary AB. Executive Director Address: 214. The PCF is a useful resource for any person or organization wishing to become better informed on general downstream infrastructure and retail gasoline price/competition mechanisms. 311 .ca Statistics Canada Statistics Canada publishes a variety of petroleum industry performance figures.ab. SW Calgary. Contact: Len Bradley. ABT2P 3H2 Phone: (403) 264-6064Fax: (403) 237-6286e-mail: pcomm@pcf. Its monthly publication “Refined Petroleum Products” (cat. Managing Editor Address: Suite 2450. and is a useful “window” on this industry. Supervisor.